The NBFC crisis has opened up a financing opportunity for AIFs, which are evaluating real estate deals
While the top 15-20% developers can access bank debt and equity funding, there is a good 30-40% whom banks and funds won’t entertain
Home-grown real estate funds are stepping up investments in residential projects, but are unable to address the huge funding gap as non-banking financial companies (NBFCs) continue to lag in financing real estate projects.
The demand for capital is significant, particularly in the housing sector, as home sales continue to be slow and external financing is needed for construction and to service debt.
The NBFC liquidity crisis has opened up a financing opportunity for alternative investment funds (AIF), privately pooled investment vehicles that are incorporated in India, which are actively investing and evaluating real estate deals.
As banks remained cautious, NBFCs and housing finance companies (HFCs) had taken over the reins of real estate financing in recent years, offering debt or loans at a lower cost and accounting for 50-60% of funding to developers.
AIFs had taken a step back as the funding scenario got competitive with NBFCs and HFCs ruling the show, until the Infrastructure Leasing and Financial Services Ltd (IL&FS) defaulted on repayments last October, which led to the liquidity stress.
“Opportunistically, the deal flow has increased for private equity funds, but they are only a part of the funding ecosystem and cannot fill the gap created by the absence of other major sources of financing. When there is serious shortage of liquidity, all kinds of developers want to raise money, but we are being very cautious and investing carefully," said Sharad Mittal, chief executive officer, Motilal Oswal Real Estate, the realty-focused private equity arm of financial services conglomerate Motilal Oswal.
A March report by CLSA had said that 15-20% of the debt ($60-70 billion) may be stressed because of high leverage of developers and weak sales, mostly in the under-construction housing segment.
The need for capital is across the developer spectrum, but unlike NBFCs, which made debt easily accessible for even smaller, mediocre builders, PE funds are more careful about where they put their money.
Amit Goenka, managing director and chief executive of Nisus Finance Services Co. Pvt. Ltd, said real estate funds are the last bastion of capital for developers. “Developers are okay with slightly expensive capital now and it’s getting us better deals, with better quality developers and projects.
Today, there is ₹10,000-12,000 crore of PE money available for residential projects, but that’s a fairly small part of the kind of exposure NBFCs and HFCs have had, and it is impossible to match that," Goenka added.
While the top 15-20% developers can access bank debt and equity funding, there is a good 30-40% whom banks and funds won’t entertain.
“Funding is a challenge. With very little loan to value remaining in projects, we have to think multiple times before committing any capital. But with the slowdown and regulatory changes, we are finally adopting a bottoms up approach with a focus on mid-income housing," said Balaji Rao, managing partner-real estate, Axis AMC. Axis AMC signed its first deal, from its maiden fund, to invest ₹60 crore in a township project of Chennai’s Akshaya Pvt. Ltd in May. After being on a long wait-and-watch mode, ASK Property Investment Advisors has invested close to ₹670 crore this year, across projects of multiple developers. Amit Bhagat, CEO and MD, ASK Property Investment, said there were many refinancing and distress opportunities today. Ambar Maheshwari, CEO (PE), Indiabulls Asset Management, said the need of the hour was equity, where the investor enters as a partner and doesn’t want regular servicing of debt.
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