Alternative Real Estate Debt – Risks & Prospects

Alternative Real Estate Debt – Risks & Prospects
Sep 2021 , by , in Realty+ Connect

The real estate alternative investment funds (AIF) are providing debt to real estate developers to meet their project financing and capital needs. Customized debt structures and calibrated monitoring system has helped not only the realty sector but also assured consistent returns to the investor. Though challenges remain.

Real estate debt funds rose to prominence in the wake of the IL&FS crisis followed by the regulatory changes. With banks and other traditional capital lending sources pulling pull back from real estate lending, real estate debt funds helped connect borrowers (often developers) with short-term capital for projects and construction loans. They occupy a small but profitable niche in the world of real estate lending.

Loan sanctions for developers during the quarter ended December 2020 witnessed a sharp 81% on-year surge in number of loan sanctions and 180% growth in sanctioned loan, as per industry survey. Some lenders are also open to investing in distressed assets buyout by developers with proven track record. On the other end, NBFCs have tightened the norms for wholesale lending by taking exposure to lower risk assets.

Most debt funds are focused on a particular loan strategy or investment idea and work with borrowers who have complex financial situations or do not have access to conventional credit.

Shobhit Agarwal, MD & CEO, ANAROCK Capital Advisors stated, “Traditionally, the lending to real estate had been by the public sector banks that were risk averse and not well versed with the dynamics of real estate sector. Such a scenario offered an opportunity for Non-Banking Financial Companies (NBFCs) to foray in the sector. However, after the IL&FS crisis NBFCs have faced difficulties raising money and this has led to the era of Alternative Investment Funds (AIF) since 2018 with almost 60 AIF now operating in the sector.”

Ritesh Vohra, Partner & Head, Real Estate, Investcorp India Asset Managers Pvt. Ltd is of the view that alternative debt funds are not a suitable solution for social housing. “The majority of housing demand is for low cost homes which carry with them execution risk in terms of keeping the right price for such projects. With government support, experienced private equity players can build social housing. It’s important to understand the long term benefits, funding needs and timeline aspects before starting such projects. But, alternative debts will play a significant role in commercial housing projects.”

Chetan Shah, Executive Director, Kotak Realty Fund shared his perspective, “I believe funds should be strategy specific. We started our business in 2005 when the FDI had just opened up in the realty market and we raised $ 2.2 billion across ten different funds. Recently we have raised a $ 380 billion fund for investing in credit strategies across all the real estate classes. We have a pool of funds available for deployment in private equity, debt, residential, commercial, retail and other asset classes. We also had investors who wanted to invest specifically in the affordable housing asset class as well as funds primarily targeted towards affordable housing. According to Oxford Economics University, not too much depreciation is expected in Indian Rupee value till 2030 that also acts as one of the key factors that investors look at before investing. Factors like strategy, investment focus and also understanding investor’s requirements are very important to drive right investors into the right asset class. So that the investor will also participate in the decision making activity.”

Amit Diwan, Managing Director and Country Head, Hines India agreed that there is enough capital in the market and lenders and borrowers both need each other. “For fruitful investments, lenders look for logical business plan, high quality operator and confidence in his execution capabilities. The developer owning a good quality project will get funding easily.  Currently, office sector is in the middle of a crisis and it will continue for some time till the economic activities recover and the occupiers once again drive the growth of commercial realty which in turn will boost investments.”

Gaurav Karnik, Partner Tax and Regulatory Services, Ernst & Young LLP Gaurav Karnik added that from the tax perspective, the government should allow commercial real estate developers to set off GST paid on inputs like cement from the tax liability on rental income to avoid double taxation and give a boost to the office market.”

With the slowdown in sales, most real estate developers struggled to raise funds to construct properties. But, with improving sales in last few months, the flow of capital towards the real estate sector has improved. However, many developers have voiced concerns on difficulty in procuring construction finance, which was once considered safest form of lending by banks and non-banking financial companies (NBFCs). Those who are getting construction finance are paying high interest rate of up to 15%.


Despite, the challenges of the pandemic real estate sector has shown great resilience with foreign and domestic investors showing interest in residential real estate apart from rentable commercial assets. They are seeing a good business opportunity in last mile stress funding for incomplete/stalled projects. According to experts, in a sharp contrast to previous years, more investors are showing keen interest in last-mile funding for stuck housing projects.

Ritesh Vohra expressed that for funding a stressed project, most lenders have a checklist of requirements to be met before assuring any investment. “There are many orphaned projects especially in residential segment where developers do not have the capacity to complete the construction, lenders have no confidence in such projects and the buyers have lost hope of getting their homes. For last mile financing, lenders usually look at projects that are near completion, have lower risk in terms of cash flow and have approvals in place.”

Still there are many projects which will not be able to come under the criteria of last mile financing and end up being incomplete. Now, to ensure that the stuck projects are delivered, specialist asset management firms have entered the real estate business. They follow the DM model where they act as development managers for developers and landowners in exchange for a share of revenue, a profit share, or a management fee. In addition, many NBFCs and reputed developers have come to the fore to invest in stressed projects.

Chetan Shah agreed that not all projects can be considered for last mile funding by banks and NBFCs. “The protection available in SWAMIH fund is not available to other debt providers. The best scenario for projects that need last mile funding for completion is to allow the incoming investor and Development Manager (DM) to complete the project with their execution strategy.”

Shobhit Agarwal added that stressed developers should offer their viable projects to large, well-funded, well-managed developers, which will result in not only completion of projects and clearing their balance sheets but also, for the growth of the whole sector. 

Gaurav Karnik pointed out some of the challenges developers are facing in raising capital, “Track record of developers is very important. When an investors or lenders puts money as equity or debt, execution of project, marketing strategy, cash flow management, etc. become an important factor to consider. For the same reasons, banks have moved away from lending extensively and they strictly evaluate the merit of developers’ past project history, market risk, partnership and execution risk and then finalize investment.”

Amit Diwan commented on the private equity funding in distress projects, “The feasibility of projects in India is impacted significantly not only by the very high tax levels but also with the risk of tax cases opening up and scrutiny for completely non-valid reasons. The sector needs simple and business friendly tax regime and transparency. Private equity is coming back in different asset classes and at different stages of the projects. The capital will get re-deployed and there will be a major shift in the product mix in the residential segment compared to the office segment in the next five years. Within the office segment there will be many more private equity funds foraying with venture capital and listed developers will be coming up with more IPOs.”

As per the report by Savills India, in the first quarter of 2021, all the investment into Indian real estate came from foreign institutional investors. Of the total, 58 percent share (Rs 78.3 billion) went towards commercial office assets while 42 percent (Rs 56.7 billion) were invested into residential real estate.


Non-traditional forms of real estate assets –from data centers to educational institutions and student housing–have become increasingly popular. Macroeconomic drivers such as urban growth, adoption of Internet and smart phones, and an aging population underpin the need for these alternative assets. Not surprisingly, against all expectations, Indian real estate recorded its highest-ever private equity investments in FY 21 since FY16 with investors focusing majorly on portfolio deals across multiple cities and asset classes.

Ritesh Vohra commenting on the trend shared that indeed there are new asset classes emerging within real estate that are attracting investments. “The real estate sector is evolving and new business models are emerging in addition to basic segments of residential, office, hospitality and retail. The new segments like warehousing, data centre, student housing and flexi spaces segment present huge growth opportunities in the coming years.”

According to Shobhit Agarwal, foreign funds are upbeat about India and high-grade rental-generating assets have attracted foreign investors in a big way even during the pandemic.  Even, last-mile funding is gaining momentum with foreign funds actively evaluating various options. “The Industrial & Logistics sector had strong investor support. Key emerging trends in this sector – rise of automation, urban multi-level warehousing, de-centralization, increasing business consolidation, and high demand for Grade A assets,” he said.

Chetan Shah stated that as a lender, their criteria for evaluation is not only the Grade A developer but, more importantly the potential to deliver quality project on time. “We even look at the developer’s portfolio so that we can partner with them on all the segments including new asset classes. We mostly look at the promising developers with great capabilities.”

Gaurav Karnik stated, “Pandemic has brought in focus internet connectivity infrastructure and usage of data. Industries need data centres to support such huge data used whether it is in e-commerce or manufacturing. Data centres are becoming the new sunrise sector, gaining attention from PE investors and strategic investors, even more than the warehousing segment.”

As per Amit Diwan, the Indian real estate is now becoming a service rather than a brick & mortar product. “Whether it’s in the working or living, the flexi-space model has a great future. Realty firms are exploring newer asset classes and are creating profits which in turn is attracting investors in those segments,” he said.

Undoubtedly, though the initial phase of the coronavirus outbreak resulted in weakening of growth sentiments, the uncertainty seems to be temporary and is expected to have a limited impact on investor sentiments in Indian realty. Real estate has traditionally been seen as a safe long term investment option. Given the pent up housing demand, the infrastructure development and the growth prospects of commercial properties and other asset classes, Indian real estate will continue to remain the preferred choice of investors – foreign and domestic.

Investors have continued to show interest in real estate financing, but have also tweaked their strategies. Entity-level buyout portfolio deals for yield-generating assets are witnessing demand from institutional investors instead of the usual debt or mezzanine financing. While, the platform level participation with debt and equity is driven by more transparency and governance in the sector.  


Given the strong fundamentals, despite the challenges, Indian real estate across products offers one of the best risk-adjusted returns globally. Thus, foreign investors have continued to invest in Indian real estate and increase their allocations even during last year of pandemic.

The office sector continues to be the blue-eyed boy for investors due to the strong fundamentals of the India office market. The investors are also emboldened by the encouraging response to the 3 REITs listed on Indian stock exchanges which provides them with a credible avenue for exit.

While the office segment has been generally favoured by global investors, foreign institutional firms are closely looking mid-income residential space as a potential investment opportunity in the long term. The affordable housing space that presents a potential for volume growth too is receiving a fair share of investments from global and domestic equity funds. The investor preference, which had moved from equity to debt in the last decade, again tilted strongly in favor of equity in 2020 and Q1 2021, indicating a resurgence in appetite to take risks and hopes for the new business cycle.

Retail sector worst hit by the pandemic saw the PE investment drop by 76% in 2020, though, in Q1 2021, PE investments in retail assets jumped to USD 484 million from USD 220 million in 2020. Warehousing and logistics emerged as the most preferred real estate asset class for institutional investors, pipping the all-time favourite commercial office segment for the first time during April-June 2021.

The first half of 2021 recorded a 33% increase in the investment in emerging asset classes such as data centres, flexible workspaces and co-living spaces. Given the increasing significance of the sector in the recent period, data centres hold vast potential as an alternative real estate asset, especially when it comes to large infrastructure investors who are looking at long-term yield income.


Private Equity: Private equity investment by an FDI or non FDI fund in a real estate project or at an entity level with a real estate developer.

Strategic Partnerships (JD/JV): Land owner participating in joint development or joint venture model with a real estate developer.

Construction Finance: Finance for completing the construction works of a real estate project.

Structured/ Mezzanine Finance: Finance structured with quasi debt & quasi equity features.

Lease Rental Discounting: Financing for tenanted properties against lease receivables.

Commercial Mortgage Backed Securities: Specialized financing for commercial properties.

Loan Against Property: Financing against real estate property

Bulk Inventory Sale: Financing by means of purchasing inventory usually at discount to market value for future capital appreciation.

Corporate Level Financing: Financing at corporate balance sheet level.

Core Asset Sale: Financing by means of sale of yielding core assets.

Public Markets: Financing via public market listing or subsequent issues.

External Commercial Borrowing: Financing via low cost foreign debt issue.

Receivable discounting: Financing against future receivables


Inputs from Knight Frank & Anarock Research

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