Debt funds fail to deliver interest payments as real estate languishes
Oct 20, 2015
Source : ET

MUMBAI:It's a wager gone terribly wrong. Rich savvy investors, who invested in real estate debt funds expecting higher yields and capital protection, are spending sleepless nights as they have not been receiving regular interest payments over the past year. Some of these investments may go down the sewer unless there is an immediate uptick in property sales and a resultant revival in the real estate sector, wealth managers and analysts opine. 

Ballpark estimates suggest that almost half of the 50-odd real estate funds - which provide mezzanine funding to developers - have turned irregular in their interest payments, which on a normal course are paid every quarter or in two instalments every year. 

"Some of the NCD issuers - and real estate funds that have invested in NCDs - are seeing delays in interest payments and probable defaults," said Prateek Pant, executive director - products & services, RBS Private Banking. 

"There's clearly a lot of liquidity stress in the real estate market. HNIs who have direct investments in NCDs are now grappling with irregular interest payments," Pan added. 

Payment delays apart, several funds have also marked down coupon rates and extended principal repayment schedules by almost 12 to 24 months. Most funds have a one-year moratorium immediately after the launch, during which period it is not obliged to make any pay-backs. From the second year onwards, funds start repaying interests every quarter, along with some principal amount. As the years progress, the portion of principal repayment goes up. 

"A handful of debt oriented RE funds has also faced delayed payments from builders and exits have been slower than estimated impacting investor returns," said Sriram Iyer, CEO of Religare Wealth Management. 
"While all of this lending is backed by collateral in the form of land or building and in some cases, personal guarantees, funds have not resorted to liquidation of collateral which in itself may not be an easy option to exercise," Iyer added. 

It's not only small funds, but a few from larger pools — managed by the likes of HDFC, Birla Sunlife, JM, ICICI Pru, Kotak, IIFL, Edelweiss, Indiabulls, DHFL, ASK Group and Edelweiss — have also tweaked payment schedules, sources said. 

"The smaller funds - with asset exposure in the range of Rs 50 - 100 crore - are staring at payout stress," said Shouvik Purkayastha, MD - capital markets group, Cushman & Wakefield. "Some have frozen their coupons because of low cash-flows. But unless there's an actual default, there's good probability of money coming back to investors, albeit a bit delayed and a bit lower returns than promised by these funds," Purkayastha added. 

Real estate funds moved on from being pure equity play (where they participated in projects) to mezzanine debt funding a few years ago as yields hovered between 18 and 24 per cent per annum. To secure their money, funds gathered 2 - 4 times collateral and tagged along 'desra' clauses which took care of immediate payout to investors. Long term payouts, however, are dependent on developer cash flows. 

ndia's real estate sector has been witnessing weakness in sales momentum, rising inventory and debt levels for the past three years. As per the latest data, unsold housing stock across top eight property markets in the country rose 18 per cent to over 1.1 billion sq ft as on June 30. Barring Hyderabad, all other cities have shown a rise in the unsold inventory, with Bengaluru showing maximum increase of 55 per cent compared to a year ago.

Though the growth in unsold stock in the National Capital Region has been just 7 per cent, the region tops the chart with 326 million sq ft, followed by Mumbai Metropolitan Region at 201 million sq ft. Last month, Moody's Investors Service said that India's bigger property developers will continue to face a challenging operating environment including weak cash flows, flat sales and stagnant prices over the next one year. 

"The whole concept of structured debt, even though it offers some protection, is not as secured as bank funding," said Sumeet Abrol, Partner, Grant Thornton India, adding, "these are debt-like products; but not as secured as classic debt. The whole pay-out in structured debt funding is dependent on cash-flows of the project." 

According to analysts, funds deployed between 2010 and 2012 are phasing through a lot of stress. Project cash-flows have also declined significantly as there's limited consumer interest at the aggregate industry level, analysts opine. 

"While commercial real estate is showing some improvement mainly because of low supply, residential property sales velocity has fallen sharply. This is impacting payouts of most mezzanine funds," Abrol added. 

It's not only real estate debt funds, but also rental yield funds that are facing sectoral headwinds. Tepid demand for commercial real estate has flattened rental yields; several funds operating in this space have not exercised escalation clauses which allow them to charge a higher rent after a specific time-period. Rental yield funds are returning 7 - 9 per cent PA - about 11 - 13 per cent lower than the promised yields. 

"Overall performance of rental yield funds has been sub-par," said Atul Singh, MD & CEO, India of Julius Baer. But rather than reducing prices outright to drive sales volumes, developers are modifying products configuration and offering incentives to prop up sales momentum. 

Latest Realty News

Oct 20, 2015
Bengaluru: Sobha Limited, India’s premium real estate developer, has won two prestigious awards at the recently-held Realty Plus Conclave & Excellence Awards 2015 for the South region.
Oct 19, 2015
NEW DELHI: In a significant order, a trial court has said that buyers can claim damages from builders if the latter fails to hand over the property on time.
Oct 17, 2015
Imagine this: bang in the middle of one of India's largest slums, Dharavi, a skyscraper rises. It's no ordinary high-rise made of bricks and cement.
Oct 17, 2015
Mumbai: Prime Minister Narendra Modi's goal to put a roof over India's 1.3 billion people just got a lift.
Oct 15, 2015
CREDAI Bhopal organised a four-day long property expo "CREDAI GRIHA PRABESHAM - 2015" from 9th October to 12th October here at Vitthal Market Dussehara Maidan.
Oct 15, 2015
KOZHIKODE: Confederation of Real Estate Developers Association of India (Credai) observed a protest throughout the state on Tuesday against the harassment meted out to a builder in Thane by officials that led to his suicide.
Oct 15, 2015
NOIDA: Realty developers' body Credai's NCR chapter on Wednesday demanded industry status for real estate as they observed a strike in protest against the "difficulty in doing business".
Oct 14, 2015
MUMBAI: Brihanmumbai Municipal Corporation (BMC), the civic body of the country's commercial capital, has received a second extension of the deadline for revision of the much-talked about Development Plan 2034 by another six months to February 2016.
Oct 14, 2015
NEW DELHI: Rajasthan government has signed four MoUs firming up an investment of Rs 5,400 crore to promote affordable housing in the state. These MoUs are a part of 27 MoUs signed by the state entailing an investment of Rs 12,478 crore in housing and urban development projects in Jaipur. Of these, 14 of the MoUs will bring in an investment of Rs 9,273 crore into housing projects
Oct 14, 2015
New Delhi: The Centre has notified new rules to extend by six months, till April 15 next year, the deadline for central government employees to file details of their assets and liabilities along with that of their spouses and dependent children, as mandated under the Lokpal Act.

Latest Realty News Of State

Realty Talk's