Bangalore: Project delays due to slow approvals and execution are pushing many real estate developers to raise capital from non-banking financial companies (NBFC) and private equity (PE) funds to refinance previous loans, repay banks or pave the way for exits by investors. According to PE funds and analysts, developers may have misjudged the time required to get regulatory approvals, resulting in inordinate delays and lenders pressing for repayments.

“A number of domestic PE funds and NBFCs are doing refinancing deals, with many of them providing last-mile funding for projects to developers," said Anuj Nangpal, managing director-investment services at property advisory DTZ India.

Developers take construction finance for commercial office projects, for example, and try to convert that into lease rental discounting (LRD), by which the loan is repaid from steady rental cash flows from the project, Nangpal said.

“In case of delay in rentals coming in, the developer has to approach an NBFC and borrow more expensive money to pay off." With PE funds mostly doing debt-financing deals in real estate, structured transactions—a mix of debt and equity—have become a fixture.

But this is a high-yield, high-risk model, while refinancing deals, although these involve an element of risk, offer assured, lucrative returns.

Parsvnath Developers Ltd recently raised 210 crore from Proprium Capital Partners for its office project, Red Fort Parsvnath Towers, in Delhi’s Connaught Place. While Red Fort Capital Advisors Pvt. Ltd continues to remain an investor in the project, Proprium helped Parsvnath refinance an earlier bank loan taken for the project, said Parsvnath chairman Pradeep Jain.

Proprium, which did its first transaction in India with Parsvnath, is a global fund that invests in emerging nations including India. Proprium Capital declined to comment.

Approval delays have come as a big blow for many real estate firms already battling slow sales in large property markets such as the Delhi-National Capital Region and Mumbai.

Balaji Raghavan, president- real estate practice, India Infoline Ltd, said as a result of such regulatory delays, pressure builds on developers because while both banks and PE funds typically want to exit a project in 3-4 years, large projects take 6-7 years for development.

IIFL has done similar deals through its NBFC. “... We have both explored and consummated transactions wherein a previous round of funding is being refinanced as a result of our investment. In such cases, it is important to diligence the reason for such refinancing," said Khushru Jijina, managing director, Indiareit Fund Advisors Pvt. Ltd. “There are plenty of opportunities that exist in the market today. However, transaction selection is critical as not every refinancing opportunity is worth pursuing."

Jijina added that while such opportunities let them take secured charge of land or cash flows, it is critical to see if it is a genuine need, and the developer should not be allowed to use the proceeds of refinance as a means to cash out.

“If the project is near-completion and has had genuine delay issues, then they will attract fresh capital. However, some assets are beyond control and developers have no choice but to liquidate them," said Rajeev Bairathi, executive director-capital transaction group and North, Knight Frank India.

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