The Indian real estate sector has recently received a much-needed shot in the arm from the Central Government. The Government has taken the initiative to put the sector back on the fast track, by announcing the creation of an AIF (Alternative Investment Fund) that will help in completion of stalled and incomplete projects in the sector. In recent news, the stress fund has already commenced disbursal for funds for finishing stalled real estate projects. This is a heartening development for the realty sector and should be welcome news for home buyers as well.
The Government backed AIF (alternative investment fund) has started off with an initial corpus of approximately Rs. 10,000 crore. The fund has commenced disbursal of money towards real estate projects. Latest reports confirm that disbursals have been made for two stressed realty projects which are strategically located in Bangalore and Mumbai. The Government has appointed SBICAP Ventures Limited as the manager for the India AIF (alternative investment fund). The chief investment officer at SBICAP Ventures Limited, Irfan Kazi, has already confirmed the starting of disbursals for two stressed realty ventures. He also talked of how around 1,800 home owners will be greatly benefiting from the swift completion of these two projects.
Key aspects worth noting in this regard
Kazi has also added that there have been several deals observed in recent times and 18 deals have already gone through the whole procedure of the investment committee according to him. He also confirmed that a stage should be achieved soon enough where at least a single deal will be funded every week by the committee. As per estimates of the Government, housing projects with approximately 4.58 lakh units, needing Rs. 55,000 crore, were stalled or left incomplete. In November, 2019, the Union Cabinet confirmed the establishment of this special fund in the format of an AIF (alternative investment fund). This would then provide priority debt funding for finishing stalled residential real estate projects. State Bank of India (SBI) and HDFC (Housing Development Finance Corp) Limited have both confirmed their agreement towards contributing to this fund. The Chairman of State Bank of India (SBI), Rajnish Kumar, has already stated that 8 out of 10 deals in Indian real estate will be finalized by March, 2020, by the stress fund promoted by the Government. The AIF will be looking at ensuring greater relief for home buyers in India but there should be a proper business perspective employed as well.
Kazi has clearly opined previously that the AIF does not function as a charity. It will be clearly operating as a body looking to ensure a sound investment proposition for all investors which will also provide relief to worried home buyers by generating the right returns. Funding has been limited to a maximum of Rs. 400 crore for a single real estate project and at Rs. 800 crore for one real estate developer. Kazi has confirmed that multiple deals can be inked with a single real estate developer as long as the benchmark is kept at the prescribed levels.
AIFs become more viable vehicles for real estate funding
Non-banking sector lenders in India, specifically those lenders with considerable exposure to the real estate sector, have been finding it difficult to affordably raise funds over the last year or so. There are concerns emanating from the real estate sector with regard to the quality of the asset, leading to greater worries for financiers and investors who are stuck in the liquidity crunch. Promoters of non-banking lenders are now shifting the real estate financing framework towards AIFs (alternative investment funds) from NBFC platforms. Many NBFCs are revamping their group strategies and are looking seriously at establishing category-II AIFs for continuing funding for real estate projects as per reports.
Some NBFCs have already commenced this procedure. ECL Finance Limited, the NBFC division of the Edelweiss Group, is reportedly planning to shift a majority of real estate developer financing to a specific AIF platform within the next few years. As of the 30th of September, 2019, ECL had approximately Rs. 11,000 crore in wholesale mortgage assets on its NBFC books while the alternate asset management business of the Group had close to Rs. 4,330 crore in private investor capital in real estate funds. In the current environment, real estate developers require capital for the long-term and with flexible terms. This is ensured through an AIF platform as per studies. Global limited partners or LPs are seeking yields and the lending strategy for real estate is perfectly in sync with alternative asset management businesses of most non-banking lenders. This is ideal for those investors who have ample capital and are patient enough to wait it out for returns.
IIFL Wealth Management Limited and the Piramal Group have jointly confirmed their co-lending partnership where they will offer last-mile financing for realty projects across tier-1 cities. This will be done through an AIF platform and the Piramal Group will be providing the seed fund of Rs. 2,000 crore initially. This will be done via existing loans in the portfolio of the Group and it will also keep scouting for other high-quality deals in the market. The immediate objective behind NBFC promoters’ shift towards AIFs for real estate funding is the market disruption arising from the crisis at ILFS (Infrastructure Leasing and Financial Services Limited). While better liquidity has lowered costs for NBFCs in the retail category, those with considerable realty exposure have not got any benefits in a manner of speaking.
Banks also prefer lending to those NBFCs which mostly emphasize on small business loans and retail since there are minimal credit risks. There is a risk-aversive sentiment amongst investors in mutual funds and across the banking spectrum, these people are not too comfortable in lending to NBFCs that have greater lending for realty projects. Yet, high net-worth investors in alternative investment funds (AIFs) have higher appetite for making investments which are comparatively riskier. Over the last 18-25 months, most big sized and reputed real estate developers have kept struggling and due to lack of ample capital in the market from mutual funds, banks and NBFCs, there is ample scope for financing via platforms like AIFs as per experts. This model ensures higher debt customization flexibility as far as real estate developers are concerned.
Things worth noting in this regard
With there being a moratorium on repayments of principal throughout the first few years for these loans, experts feel that the AIF (alternative investment fund) platform is much more suitable for real estate financing. Scheduled repayments under these platforms can be better tailored and customized for meeting cash flows of real estate developers. On the other spectrum, NBFCs have borrowings to be promptly repaid on the basis of a particular schedule which may not always sync with the cash flows of borrowers, leading to a mismatch between liabilities and assets. A shift in real estate financing to AIFs from NBFCs is usually backed by regulatory changes. NBFCs are regulated by the RBI (Reserve Bank of India) and AIFs come under the regulation of SEBI (Securities and Exchange Board of India). Unlike regular mutual funds where retail investors’ funds are pooled, category-II AIFs usually garner funds from HNWIs, overseas investors, corporate treasuries and domestic institutional investors.
The minimum amount for investment is approximately Rs. 1 crore as per regulations issued by SEBI. Yet, the organization has clarified that such funds can invest only in debt securities/debt of listed/unlisted investee entities. SEBI has stated that category-II AIFs cannot offer pure loans for borrowers and hence cannot be vehicles for financing/lending. AIFs cannot directly operate as lenders. These funds can pool the money of investors and invest in debt securities. These may be optionally-convertible debentures/non-convertible debentures or structured credit notes of portfolio companies. SEBI has come down hard on AIFs offering term loans and has directed some AIFs to recall term loans and provide undertakings for not offering such finding in the future.
Actually, the feasibility of the entire arrangement is dependent on the stage that the real estate developer is at and what the company is basically seeking in terms of funding. Borrowing via AIFs may be more expensive at the construction stage as per experts. AIFs and venture capital funds have enabled funding for purposes like land acquisition rather than replacing construction finance as per experts. The lower cost of funding will keep bank lending at the forefront as the preferred choice for real estate developers at the moment. Those developers who cannot access funds from conventional lenders, will seriously consider taking the AIF route according to them. AIFs thus gain prominence as a last-mile funding solution for developers unable to get debt from NBFCs or banks. They also take precedence in a scenario where project completion is the key priority, over and above the cost of funds.
14 projects referred by LIC Housing Finance for last-mile funding
LICHFL (LIC Housing Finance Limited) has referred a total of 14 real estate projects for last-mile funding via the AIF (alternative investment fund) established for reviving stalled housing projects. LIC Housing Finance has approximately Rs. 1,100 crore in exposure to these real estate projects, being the only financier for all its realty ventures. The company has stated that it holds firm control over its entire portfolio of developers without having any consortium or joint lending model. LIC HFL has advised developers of these projects to get in touch with the investment manager for the Government promoted AIF, which is SBICAP Ventures.
5 cases of NPAs (non-performing assets) have also been referred to the NCLT (National Company Law Tribunal) by LIC HFL. The top 10 real estate developer loans comprise of close to 15% of the overall loan book for developers as of the quarter ending in December, 2019. There are bad loans of roughly Rs. 5,686 crore where Rs. 2,000 crore is from project loans with the remainder being in the retail category. In November 2019, the Union Cabinet issued its approval to a special window fund for offering debt financing on priority for completing stalled real estate projects in the mid-income and affordable housing categories. The RBI has also issued its permission to banks for extensions of the dates of commencement of commercial operations or DCCO for project loans for commercial real estate. This is in case of projects that have been delayed for key reasons beyond the control of the promoters. The extension can be given for another year. According to the RBI, this will not lead to any downgrading of the classification of assets.