At the project level, NBFCs, banks and private equity funds are actively pursuing new developer partners to bail them out.
At the project level, NBFCs, banks and private equity funds are actively pursuing new developer partners to bail them out.

Realty lenders stare at bailouts, deep haircuts amid liquidity crisis

  • Serial defaults by IL&FS Ltd group in September triggered a liquidity crisis, making it difficult for NBFCs to raise money
  • In Bengaluru, a 10-acre land parcel on Bellary Road that was to be developed by Fortuna Projects, may see Embassy Group stepping in

BENGALURU: Lenders to stressed property developers are looking to sell their loans or take deep haircuts, apart from selling entire projects to stronger developers as a liquidity crisis grips real estate.

With many residential projects stalled or delayed amid weak sales, interest burden has ballooned, prompting banks, non-banking financial companies (NBFCs) and private equity funds to exit with a haircut. The haircuts could range from 20-60% depending on the net asset value of the project, according to industry estimates.

Serial defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) group in September triggered a liquidity crisis, making it difficult for NBFCs to raise money. Many of them stopped fresh lending and also halted disbursing previously-sanctioned loans.

Khushru Jijina, managing director, Piramal Capital and Housing Finance Ltd said some lenders are proactively approaching other developers to resurrect certain projects. Interest burden has piled up in some projects and lenders are happy to exit with a haircut if there are interested investors.

“So many projects have lost equity value that there is no choice but to seek solutions like these. We have proactively given one project to a better developer who will execute it. We are also evaluating certain portfolios of other NBFCs," Jijina said.

While there has been some consolidation among developers with larger developers taking over projects from smaller firms, the crisis may see stronger NBFCs buying out projects from other NBFCs, multiple people said.

Global private equity firm KKR is in initial discussions with shareholders of Altico Capital to buy a controlling stake in the NBFC, Mint reported on 5 May. An executive with another NBFC said they are also evaluating Altico’s portfolio.

At the project level, NBFCs, banks and private equity funds are actively pursuing new developer partners to bail them out. The lender, who would have already lost money in the delayed project, can either get a portion of the built-up area or some cash in return. The lender can even offer top-up construction finance to the new developer. Swapping or selling the loan to another lender is another option.

In Bengaluru, a 10-acre land parcel on Bellary Road that was to be developed by Fortuna Projects, may see Embassy Group stepping in. HDFC Property Fund had invested 40 crore in the project four years back that has since grown to 115 crore. HDFC has taken a haircut of 30 crore on the investment and is yet to recover 85 crore, said a person familiar with the matter, on condition of anonymity.

“Embassy plans to build an IT park on the site along with some adjoining land. It will be a joint development agreement, where HDFC gets a portion of the built-up area," said the person quoted above.

Jitu Virwani, chairman, Embassy Group confirmed they are in talks with HDFC Property Fund.

An executive at a large state-run bank said the process is much like changing the management under the Insolvency and Bankruptcy Code (IBC). “When most loan agreements are signed between a builder and a bank, there is a clause on substitution. This states that in event of a default, the bank shall replace the builder with a new one," said the executive, requesting anonymity, adding that the current management changes in stressed commercial real estate loans are mostly being done by large banks.

Vinod Menon, CEO, Citrus Ventures Pvt. Ltd, a Bengaluru-based developer said solutions are being customized as per the situation but the attempt is to turn a non-performing asset into a good one. “We are also in talks to take over such projects, but only those which still have some value left in them," he said.

Rajeev Bairathi, managing director, Shearwater Ventures, a capital management and advisory firm, said the company is in talks with NBFCs and banks for similar deals where portions of the portfolios are up for sale. As Niranjan Hiranandani, managing director of Mumbai-based Hiranandani Communities put it, “In a market that is devoid of liquidity, the solutions are not going to be easy."

Shayan Ghosh in Mumbai contributed to the story.

Close