Tuesday , May 30 2017

NBFCs and Private Equity (PE) Firms to lLend Real Estate Companies

Private Equities and NBFCs back developers have come into the rescue of Real Estate Developers, as banks are reluctant to lend the Real Estate Developers

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Non-Banking Financial Companies (NBFCs) and Private Equity (PE) firms are willing to lend the real estate companies, which were denied by Public and Private Banks. They can lend and even offer a two-year moratorium as told by three fund managers.

On the other hand, the Real Estate Developers are struggling hard to repay debt because both sales and unit launches have dropped. “Sales are now being driven by end users and people will no longer buy apartments that are just a hole in the wall,” said Amit Pachisia, chief credit officer at Altico Capital. Demand, which is sitting on the fence at the moment, might surge when there is some evidence of near completion so execution is essential, Pachisia added.

The Managing director of Piramal Fund Management, one of the largest real estate lending platforms, told that there is hardly any option to tackle the issue of weakening sales at the moment than to complete projects.

The Provisions of the Real Estate (Regulation and Development) Act, 2016 at present is not allowing companies to sell apartments at the launch stage, scuttling the traditional practice of selling a part of land at the pre-sales stage itself. Therefore, Real Estate developers can only borrow money in such circumstances. It is obvious that structured debt finance has erupted in contrast to bank denial of Credit financing. Last year, an estimated 80% of $3.1 billion has made its way to residential projects, according to a Cushman & Wakefield estimate. According to Reserve Bank of India data, banking sector financing to real estate increased by just 1% in the past one year (until January 2017).

The Developers can utilize the period of moratorium so that they can use the funds to build without immediately worrying about velocity of sales.

Banking authorities cannot make such adjustments. The supposition is that when customer find the project interesting with speedy progress in construction then sales will automatically follow. “The value of a ready flat is far greater than that of under construction assets,” said Jijina. The plan includes the repayment schedule timed in line with the cash flow from the project.

It’s a win-win situation should market fundamentals improve and people be willing to purchase mature assets, which, as Jijina mentioned, is more expensive. However , if the last three years are any indication, projections can hardly be cast in stone, opening up the sector to the possibility of a massive debt trap and refinancing requirement.

According to Bloomberg data, debt of the 10 listed real estate companies stood at a high of Rs46,268 crore for the end of the quarter, up from R44,159 crore. Nonetheless, Experts predicted that the concerns surrounding capital availability will be allayed because of the provisions of RERA. “Transactions will become far more refined when RERA kicks in so factors like completion timeline, mismanagement of funds, etc, that worry funds will be taken care of,” said Neeraj Sharma, director at Grant Thornton.

Actually, structured debt finance is about 8% more expensive than bank debt. But, the lack of cash flow would make them to access structured debt despite the higher cost.

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