The Highs And Lows Of Realty Investments
The Real Estate Sector Would Take A Bit Longer To Recover From The Current Covid-19 Pandemic Crisis. With Such All-Pervasive Uncertainty, It Is Going To Be A Roller Coaster Ride For The Remainder Of 2020.
Real estate needs money to complete the last mile projects, partially completed projects and the refinancing of the loans which had maturity of moratorium. All these projects need additional liquidity to kick start the construction, to build the confidence to the existing and potential customers.
Between 2013 and 2019, approximately 15.62 lakh units were launched across various projects in the top 7 cities of India. These units and projects which now at various stages of construction. Of these, 4.58 lakh units form part of stalled projects which cumulatively require INR 55,000 cr for completion. To address this, the government set up a fund (SWAMIH) of INR 25,000 cr to provide priority debt funding (last mile funding) for completion of these stalled units.
The progress is dismal though, as it has approved many projects but in reality, nothing so far is virtually disbursed. hope is that the fund will start aggressive disbursements to the projects already approved.
Sunil Rohokale, MD & CEO, ASK Group explained, “Total exposure of banks/nbfCs and HFCS together is about rs 5 lacs cr and 50% of that exposure is stressed currently. out of the stressed assets, if the govt. SWAMIH fund contributes rs 25,000 cr then the sector needs additional rs 2,50,000 cr. The distressed asset within the stressed asset seems to be about rs 1,25,000 cr. hence what is the requirement today is rs 1,25,000 cr as restructuring by banks /nbfCs /HFCS and rs 1,25,000 cr from distress asset funds which are structured equity and debt combination and would give 4-5 years of capital. The cost of the capital is surely going to be significantly higher but that will help in execution and creating cash flow in the projects. This is the only way we can expect the sector recovery or else we will have most cases landing into IBC.”
Sharad Mittal, Executive Director & CEO-Real Estate Funds, Motilal Oswal Real Estate Investment Advisors II Pvt Ltd added, “Apart from the Indian sovereign fund, there are various other foreign funds (primarily Us based funds) with a potential to invest up to INR 35,000 Cr in such cash-starved projects. however, very few of these funds have actively invested in such projects so far due to a mismatch between risk and return and challenges pertaining to legal enforcement in India.”
BANKS, NBFCS & PES CAPITAL INFUSION
Total banking sector exposure including NBFCs and HFCs to real estate and housing finance is rs 20 lac cr and 25% of the same is exposure to developers through construction finance or lease rental discounting. most of the distressed assets are on the balance sheet of NBFCs and HFCs.
“To ensure the revival of the project and to protect their lending, the only possible solution seems to them is allowing first change to new lender or distress fund. To make the viability, there could be a possibility that earlier lender needs to take a haircut and get the repayment upfronted so that it aligns every one’s interest and the project completion become real. Active control and asset management is what the new distress funds will look at hence developers and existing lender need to be mindful of the rights seeded in favour of them to avoid conflict and stressed working environment of decision making,” stated Rohokale.
Investors are looking at predictable and consistent returns and not more returns, hence investors will give highest priority to margin of safety through entry price and mitigating potential highest risk of execution. One can expect control transaction with active asset management will become the norm.” Sunil Rohokale, MD & CEO, ASK Group
“The government should consider rolling out “realty bonds” or “infra bonds” with attractive features including exemption of interest and capital gain from taxation. In the current scenario. These bonds will be more attractive and will be a preferred mode of investments for large retail investors, which in turn generate the desired funding for the sector.” Jayesh Kariya, Chartered Accountant And A Real Estate Expert
Until 2012, banks were the primary lenders to real estate in india. however, with rising NPAs, RBI conducted an Asset Quality review (AQr) on many banks. high value of bad loans led to many banks being placed under prompt corrective action (PCA) in 2015 which eventually led to banks reducing their exposure towards real estate.
During the next few years, nbfCs emerged as the largest lenders for real estate projects. nbfCs lent very aggressively until September 2018, when the IL&FS Crisis resulted in a severe liquidity crunch as they became very selective about releasing already-sanctioned loans.
“As per rbi, outstanding credit of nbfCs to real estate as on September 2019 was INR 1.29 lakh Cr while that of banks was INR 2.18 lakh Cr. Pe funds formed a very small proportion of the total o/s credit to real estate, informed Mittal.
“While the financial system of India, from banks to non-banking financial Companies (nbfCs) have had their share of problems in the previous decade, private equity (Pe) had emerged as a major source of capital for the real estate sector attracting investments of over USD 45 billion from 2011 till may 2020. The investments from Pe funds, Pension funds, and sovereign funds witnessed significant traction across various product mix ranging from residential to warehousing and Co-working,” added Jayesh Kariya, Chartered Accountant and a Real Estate Expert.
While the conventional modes of funding will continue to fund the realty sector the platforms like REITs and InvIts offers potential for raising real estate financing.
REAL ESTATE INVESTORS’ INTEREST REVIVAL
The real estate sector not only got impacted by the paucity of the capital but also due to the reverse migration of construction workers. Unless there is progress on the site, there is no possibility of existing customers giving the drawdowns or new customers buying the new apartments. hence it is critical to have capital and workers to kick start the projects gradually.
The first-time home buyer in the affordable housing market has been always buoyant but got marred by pure failure in execution. middle income home market has lots of latent demand which was postponed for almost last two years. The properties in the price range of rs 3060 lacs are already started forming bottom and with focus on relentless execution we could see substantial recovery in next financial year.
“The last few months have impacted developer’s cashflows significantly and during the lockdown, the reverse migration of labour was the biggest challenge. As a private equity investor, one has to work closely with the partners to focus on two things – prioritizing cash flows during the lockdown and devising a clear action plan to revive activity as the lockdown is lifted.” Sharad Mittal, Executive Director & CEO Real Estate Funds, Motilal Oswal Real Estate Investment Advisors Pvt Ltd.
Middle-income home could also get boost because of the lower home loan interest rates. luxury is the most impacted segment and clearly linked to economic growth and euphoria. it appears mumbai and Delhi luxury properties will have to wait for longest period of 3-5 years before the full revival.
“Going forward, it is imperative that we understand the risk well and devise a mitigation plan before investing. in the current scenario where customer trust is at an all-time low. we believe that one of the biggest risks in residential real estate is that of project completion. As an investor, we seek to achieve financial closure in our projects before investing,” shared Mittal.
Indeed, over the next 12 months, several developers will face survival crises as the sector consolidates. As the economy recovers and sentiment improves, demand will pick up too and in the period following the next 12 months, we will witness several of the lost demand coming back to real estate.
“Industrial real estate will play a crucial role in india’s bounce back to recovery,’ mentioned Kariya. “As global trade contracts and supply chain disruptions continue to holdback global commerce, a move to rapid localization of supply chain networks and capacity creation may provide the needed push to industrial recovery, he said.
A few factors which will bode well are: a) interest rates are at an all-time low; b) prices have stagnated for 5 years and may selectively reduce further over the next 12 months and c) investors will look at increasing allocation towards real estate to reduce the volatility of the entire portfolio.
On an optimistic note Rohokale expressed, “If we do not see mass scale job losses or income losses, we can expect the sector to surprise us because the inflation-adjusted affordability is the best today. Property prices have declined, and the priority of the developer is on cash flow hence more transaction is the possibility.”