Cash strapped builders turn to PEs, NBFCs to refinance debt
Aug 14, 2015
Source : Toi


BENGALURU/MUMBAI/NEW DELHI: Real estate developers are increasingly turning to private equity investors and non-banking finance companies to refinance massive debts due to sluggish home sales in the last couple of years and banks becoming cautious about lending to the industry.

Private equity investment in the real estate sector grew nearly three-fold year on year in the first half of this calendar year and a majority of that money has gone into debt refinancing, say industry watchers. While builders need money to service debt, provide exits to earlier investors and to complete some projects, investors are attracted by lower risks because most these projects are closer to completion, have all required approvals, and they can also drive a hard bargain with cash-strapped builders on valuations.

"The slackness in the market, availability of refinancing at lower rates and top up needed to take the projects further are essentially three factors behind such deals," said Anuj Puri, chairman and country head at real estate consultants JLL India.

A lot of pressure has built up on the Indian real estate industry over the last two years. A recent report by property advisory firm Knight Frank put the cumulative nationwide unsold inventory of residential projects at 706,900 units, which would take more than three years to sell. In the last one year, Indian real estate market has seen a 40 per cent drop in new residential project launches and a 20 per cent dip in home sales.

With banks reluctant to lend, developers were forced to raise money from private moneylenders, family offices, private equity funds and NBFCs at high interest rates of as much as 25 per cent to retire their debt and meet working capital requirement. Now they are looking to refinance these high-cost debt.

PE investors confirm that proposals for such deals from builders are on the rise. "We have been receiving proposals for deals involving refinancing and the numbers of such proposals are on rise particularly in residential segment," said Ambar Maheshwari, CEO for private equity funds at Indiabulls Asset Management Company.

Recently, Piramal Fund Management invested Rs 1,200 crore in a project of Omkar Realtors & Developers and part of this was for repaying existing debt.

Delhi-based builder Parsvnath Developers raised Rs 355 crore from Edelweiss, while Total Environment Building Systems, a Bengaluru-based developer of luxury homes, raised Rs 255 crore from Indostar Capital Finance and Mantri Developers raised Rs 250 crore from Peninsula Brookfield.

According to data from real estate consultants Cushman & Wakefield, PE funds have pumped inRs 11,180 crore in the commercial and residential real estate in six months ended June, compared toRs 4,002 crore a year earlier.

Many non-banking finance companies (NBFCs), too, are using this opportunity to enter projects with good revenue visibility.
"It's not new, but off late refinancing deals are going up," said Amar Merani, CEO at Xander Finance, an Indian NBFC arm of multinational investment firm Xander Group. "A private equity player that had invested at land acquisition or pre-approval stage may have to exit now because of the fund's tenure. It's a good opening for us as the project now has better revenue visibility post approvals and maturing of the project," he said.

Merani said due diligence for these transactions is carried out in a similar way to any new deal, while "annual returns are usually in the range of 18 per cent-20 per cent".

It's not risk-free investment, though. Experts say the refinance deals come with challenges for both builders and investors.

Developers take a hit on their originally expected margins when they have to refinance a project, while the refinancer needs to ensure that a developer has enough motivation left to complete the project. Investors are adopting different strategies to ensure this.

"What smart investors today are doing in refinancing deals is ensuring all pain points of a builder are addressed rather than just concentrating on pain in just one project," said Anckur Srivasttava, chairman of GenReal Property Advisers. "Some funds are providing refinancing for consolidated debt of a builder. This imposes a lot of discipline on the builder as well," he said.

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