MUMBAI: Funding, or rather the lack of it, has been one of the key concerns of the real estate developers throughout 2013. However, if we look at some of the key policy decisions that have been taken in the year, it seems 2014 is all set to get big ticket funding. The money is poised to be invested in the sector and if not as private equity, the biggies will put in money through Real Estate Investment Trust (REIT). The reports suggest that private equity funds such as Kotak Realty Fund, Tata Realty & Infrastucture, Blackstone, Xander and others, are getting ready to float REITs in the country once the capital markets regulator comes out with the final guidelines on such securities.
Kotak, Tata Realty, Xander and Blackstone have investments in rent producing IT parks and other commercial assets, which can form part of underlying assets of a REIT. By floating the REITs and listing them on stock exchanges, the funds would get exits in their investments. According to Morgan Stanley, India has 400 million sq ft of office and mall properties valued at $60 billion (Rs 3.72 lakh crore).
Tata-Sons owned fund manager/developer Tata Realty and Infrastructure (TRIL), which is an advisor to realty fund TRIF-I, is also looking at floating a REIT here and in Singapore, over a period of time. TRIL’s first fund Tata Realty Initiatives Fund (TRIF-I), has a corpus of $750 million and owns around 90 per cent stakes in the company’s mall projects in Amritsar and Nagpur, among others.
The US-based Blackstone has also started the groundwork for launching REITs. Blackstone is the most aggressive investor in commercial properties in the country and has invested nearly $1 billion in Indian commercial properties, mostly in IT parks and special economic zones since 2011. Some of its major investments include its $149 million investment in DLF Ackruti Info Parks in Pune and the $200 million investment in properties of Embassy Properties among others.
Xander, which manages capital of over $2 billion and over 50 million square feet of residential buildings, office complexes, retail malls, is also looking at REIT structures. Industry analysts maintain investors such as IDFC, Everstone and others, who have investments in rent producing assets, could also look at REITs once they are allowed in the country.
Sachin Sandhir, managing director, RICS, South Asia, says he genuinely feels that REITs are a step in the right direction provided it is addressed correctly with taxation issues and can bring the retail investors forward. Since their announcement, there has been sudden interest from foreign funds, who are now looking to invest in income producing assets with a potential exit option.
Moreover, PE funds are down but they have not dried up. These funds have only equipped themselves with safeguards. A Cushman & Wakefield report in June 2013 says USD 2 billion (INR 11,854 crores) is available with private equity firms ready to be deployed in real estate, despite a drop in the PE investment in the first half of 2013. While the PE investments in real estate were recorded at USD 276 million (INR 1,638 crores) in H1 2013, which is 46 per cent lower when compared to the first half of 2012 (USD 514 million / INR 3,050 crores), the PE funds continue to show keen interest in the market, with a number of deals in discussion.
“From the policy perspective, there has been a clear realisation within various circles that the housing sector needs to be propelled through various mechanisms, for investments to increase for the sector. If you look at the last six months, whether it was the Land Acquisition Act, Regulator Bill, REIT guidelines; suddenly there was plethora of activities and buzz happening in the finance ministry and also about the measures that can be taken to get the economy back on track. Some of these developments have the ability to change the market dynamics significantly,” says Sandhir.
PK Tripathi, president, Unitech, explains that the most important aspect of the business is financing which should be addressed. Demand is increasing and with the number of regulations coming in, it will be all the more difficult to raise funds. So, when demand will increase and supply will not be in a position to match that, then the prices will go up. So, option like REITs are coming up but this is only one of the fund raising products. Other such products also need to come up, especially for buying the land.
“I would even suggest financing for land purchase. Land is something that cannot go anywhere. So, even if you are getting 50 per cent finance for the same, it can ease the liquidity crunch of the developers. You are not allowing finance for buying the land, you are not allowing for foreign companies to invest in the company even as an equity partner; I fail to understand why real estate is not being treated like any other industry,” opines Tripathi.
Navneet Bhadla, director, Brys Group, says the sector has waited for long and in 2013, the buzz has been that NRI money will come into the sector. It was more of an expectation, which did not materialise. She feels it became a news point when the rupee depreciated and there was a lot of hype about it but the depreciation of rupee has hurt the sector. “With elections ahead and the government having the last chance to put the economy back on track, I feel some of the liquidity concerns of the sector would be addressed with the budget. Instruments like REITs will also see execution, with clear taxation policies and all this makes me optimistic that 2014 could be a game changer year,” shares Bhadla.
Neeraj Bansal, partner-Real Estate & Construction with KPMG India, seconds this point. According to him, NRIs also need stable currency to enter the market because a lot of NRIs who had earlier invested were uncomfortable with the rupee depreciation. “In any market where the sentiments are low and the currency is volatile, no one wants to enter that market. It is not that money has not flown in but many of them preferred to park it in fixed deposits than real estate,” points out Bansal.
“The moment you launch a new project, a significant amount of investment goes into that project and when your project gets delayed, it affects your overall cash flows, whereas, when you deliver a project, the liability is shifted from your balance sheet,” explains Gaurav Gupta, managing director, SG Estates. “Moreover, launches here are also a function of the release of land in the market. Hopefully, it will start getting released from the next year and by that time, the cash flow of the developers will also be better than it is now.”
So, the year 2013 may have been the year when both, the developers as well as the lenders were waiting for policies like the REIT to roll out, as well as other cost and benefit analysis. However, the direction in which the market is heading to, added with the new funding sources being cleared by the government, it seems the turnaround of the financial fortunes of the realty sector, is on the cards, in 2014.