Home >Money >Personal Finance >‘NBFCs will get recapitalized, banks will get more prudent with lending’

Hines, an international realty firm, and Conscient Infrastructure, a Gurgaon-based real estate developer, recently launched a 2,000 crore premium residential project in Gurugram. In a chat with Mint, Amit Diwan, country head and managing director, Hines India, spoke about the current market condition, demand for the project, and more

How has the experience in India been so far?

We have been in India for 13 years. It was identified as a market where we could do long-term business. We are currently present in 24 countries; a lot of these are developing markets like Russia, China, Brazil, Mexico and Poland. So the unique emerging market risks are known to us. Whenever we enter a new market, we want to go slow, until and unless we see at least one full cycle. We entered India with two projects (both office developments), which is what we have done majorly in our portfolio globally. We delivered these two projects in 2013-14. Our two buildings are fully occupied and are attracting much higher rentals than the prevailing rates in the market.

So we are now in the second stage of our journey; we chose the residential sector to invest in 2014. With the second fund, we invested in three residential projects—one each in Gurugram, Mumbai and Bengaluru. This was our way to diversify the risk and also test each market where we want to grow.

In the last few years, there have been a lot of regulatory changes in India. How do you see them?

If I compare my experience with Singapore, where I have lived for several years, I think we are on a par in terms of our intent to change. Singapore wants to continuously improve on its standards. I see that same intent in India, at least with this government. Real Estate (Regulation and Development) Act, 2016 or RERA, Benami Property Act, goods and services tax (GST) and demonetization—all were well-intended. But we are not up to Singapore’s standards on execution of these changes.

I think it will take several years before we transform from the old world to the new world, and there will be pain during this period. We are in the middle of that period.

We as a company are very happy with all the strategic and fundamental changes the government is trying to make. Today, acquiring land or floor space index is far easier compared to five years ago. So with raw materials in place, with the general quality of consultants and contractors continuously improving, and transparency in dealing through GST improving too, we really like the change.

How do you see the current liquidity crisis? With banks and NBFCs being cautious in funding real estate, do you see private equity firms (PE) coming back?

In private equity, I lay the emphasis on the word “equity". For the last several years, PE has largely gone into not taking development risk. You have Blackstone, Brookfield and others, who said I don’t want to take development risk, give me a completed asset, I would like to own it. I am not lending to that building. We have not had PE in the development space. And the reason is that people don’t see commensurate premium for equity risk compared to debt risk. If I or my PE friends approach a developer and say that we expect a premium between what you are paying to your lenders, say 16% internal rate of return for land risk, we need to be compensated with 22-25% returns for all the risk we are taking, the developer will laugh and say we don’t have such margins for our own projects now, how are we going to pay you, which is a fact. Therefore, the PE space evaporated from the market.

They will only come back if there is a risk premium and for that, inherent projects have to generate value, and the only way it will happen is if the land prices go down significantly.

So where will funding come from? I think NBFCs will get recapitalized and banks will get more prudent with their lending. PE is also entering with NBFC ownership. They are looking at recapitalizing operating companies of NBFCs as there is no fault in their module.

Demand in the residential segment has been subdued. Do you think you will be able to attract enough buyers for your premium housing project?

Irrespective of market conditions, if you have the right intent and customer-first approach, you will be able to attract customers. I want to design a project that my customer wants. Therefore, we said that we don’t want a four- or five-bedroom apartment as a core. We have fewer four-bedroom units but our core unit consists of three-bedrooms. Now for saleability, you can design the cheapest possible three bedrooms and sell a lot of units but it may not be liveable. So a three-bedroom can be designed in 1,200 sq.ft, 2,000 sq.ft or 3,000 sq.ft. Some of our competitors have designed three bedrooms in 3,000 sq.ft. We think it is a little too much and it makes it a little unaffordable. In 1,200 sq.ft, it becomes congested and at least NCR customers don’t want that, so you need a more appropriate size. We have taken inspiration from different products and provided sizes that our customer surveys gave us. I can build a balcony and I can feel very happy that I have provided a green space in front of it, but whether customers actually want to pay for it or not is a question of affordability.

We also have to have the basics in place. We have a great motorable road, and we are not relying on infrastructure that will come in the future. We have designed it as per customers’ needs, and put in global standards. Our budget and schedule is also under control and we are confident that we will be able to deliver the project on time.

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