Monday, 14 December 2015

Flows into realty at 7-year high

Investments into the real estate sector in 2015, at close to $8 billion or Rs 53,000 crore, are poised for a seven-year high. Much of this has come in via the private equity (PE) route and borrowings through non-convertible debentures (NCD).

The size of the inflows might seem surprising given the sector is not particularly in good shape. The residential space, in particular, has been under pressure though the commercial property piece has done reasonably well. However, less than a fifth of the PE funds raised has found its way into commercial real estate; the bulk flowing into residential ventures allowing prices to remain firm. Indeed, if developers have not dropped prices, it’s thanks to investors backing them.

Cushman and Wakefield estimates around $2.8 billion or Rs 18,700 crore had been invested by private equity players in the real estate market till end September. Add to that an estimated $4.5 billion, or Rs 30,500 crore, of NCDs - till November 2015 - and the tally is already up by 74% over last year’s Rs 17,600 crore.

Another $500 million, before the year is out, market watchers say, is par for the course.

Had the investments not materialised, developers may have been pushed to drop prices to monetise inventory at a time when demand has been waning. Instead, they’re holding on to inventory and refusing to pay back their lenders. CRISIL estimates current debt obligations of the sector at around Rs 30,000 crore.

Not surprisingly, the cost of alternative funding has jumped in the last couple of years, with developers strapped for cash; a third of the NCDs yielded an internal rate of return of 20%, whereas in 2012, there were virtually no comparable issuances. “As for PEs, the higher return expectations will increase the refinancing risk for the realtors over the longer term,” CRISIL noted. It’s hard to see how builders are going to be able to refinance what they have borrowed through NCDs, since banks are not readily lending to the sector. What some developers are doing is to to offload in bulk to PE players at a big discount.

Nevertheless, builders aren’t in as much trouble as they might have been because, as Vikas Oberoi, chairman and managing director of Oberoi Realty points out, there seems to be no shortage of money backing real estate ventures. Others argue the market is seeing a “time” correction given there’s been no rise in prices over the past one year.

While the financial schemes offered by developers could be considered to be in the nature of a discount, the fact is that builders have managed to sell apartments by reducing the size and leaving the rates per square foot unchanged.

Investors, many of whom have skin in the game, are betting the markets will move soon. From Blackstone to Goldman Sachs and Warburg Pincus to GIC (Government of Singapore Investment Corporation), they’re picking up stakes in projects or a clutch of projects or even at the level of the enterprise. And they continue to scout for opportunities; Canadian Pension Fund and Macquarie, for instance, are on the lookout for deals. Sumeet Abrol, partner at Grant Thornton, says a big chunk of private equity money has moved into property that’s already been built and assets that are generating income and, therefore, carry no execution risk.

Domestic funds alone have injected more than $2 billion into the residential sector so far this year, of which an estimated 80% is in the form of structured debt. For developers borrowing via a structured product, it means not having to provide collateral; for investors, it ensures they can exit at a pre-determined return. As Abrol explains, because the products are tailored differently, the risks for investors today are far lower than they were in 2008. For example, most PE players ensure they have the first charge on cash flows. “Also, since the investors are calling the shots, projects today are valued 20% lower that were two years back,” he added.

Despite the precautions, there could be problems. Ratings agency CRISIL estimates that, for a clutch of 25 companies, the payout to PE funds in the next five years could be an overwhelming Rs 85,000 crore. That’s assuming a nominal 20% return. Samantak Das, director of research at Knight Frank India, believes prices may hold for the next eight quarters but in the absence of demand they’re unsustainable. A Bain Capital report, published in May 2015, said India suffers from an exit overhang since large a number of funds have burnt their fingers, and vintage investments, made at peak prices are in trouble.

Source: PropertyatNeoDevelopers.Wordpress.Com

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