By: Ravi Sinha
Track2Realty Exclusive: Funding, or rather lack of it, has been one of the key concerns of the real estate developers throughout 2013, yet if some of the key policy decisions that have been taken in the year it seems 2014 is all set to get big ticket funding. The money is poised to be invested in the sector and if not as private equity, the biggies will put in money through Real Estate Investment Trust (REIT).
The reports suggest that private equity funds such as Kotak Realty Fund, Tata Realty & Infrastucture, Blackstone, Xander and others are getting ready to float REIT in the country once the capital markets regulator comes out with final guidelines on such securities.
Kotak, Tata Realty, Xander and Blackstone have investments in rent producing IT parks and other commercial assets, which can form part of underlying assets of a REIT. By floating a REIT and listing them on stock exchanges, the funds would get exits in their investments. According to Morgan Stanley, India has 400 million sq ft of office and mall properties valued at $60 billion (Rs 3.72 lakh crore).
Tata-Sons owned fund manager/developer Tata Realty and Infrastructure (TRIL), which is an advisor to realty fund TRIF-I, is also looking at floating a REIT here and in Singapore over a period of time. TRIL’s first fund Tata Realty Initiatives Fund (TRIF-I) has a corpus of $750 million and owns around 90 per cent stakes in the company’s mall projects in Amritsar and Nagpur among others.
The US-based Blackstone has also started doing spadework for launching REIT. Blackstone is the most aggressive investor in commercial properties in the country and has invested nearly a $1 billion in Indian commercial properties, mostly in IT parks and special economic zones since 2011. Some of its major investments include its $149 million investment in DLF Ackruti Info Parks in Pune and the $200 million investment in properties of Embassy Properties among others.
Xander, which manages capital over $2 billion and over 50 million square feet of residential buildings, office complexes, retail malls, is also looking at REIT structures. Industry analysts maintain investors such as IDFC, Everstone and others, who have investments in rent producing assets, could also look at REIT once they are allowed in the country.
Sachin Sandhir, Managing Director, RICS, South Asia says he genuinely feels that REITs is a step in the right direction provided it is addressed rightly with taxation issues and can bring the retail investors forward. Since its announcement there has been sudden interest level of foreign funds, they are now looking to invest into income producing assets with a potentially exit option.
Moreover, PE funds are down, but they have not dried up. These funds have only equipped themselves with safeguards. A Cushman & Wakefield report in June 2013 says USD 2 Billion (INR 11,854 crores) is available with private equity firms ready to be deployed in real estate, despite a drop in the PE investment in the first half of 2013.
While the PE investments in real estate was recorded at USD 276 million (INR 1,638 crores) in H1 2013, which is 46 per cent lower when compared to first half of 2012 (USD 514 million / INR 3,050 crores), the PE funds continue to show keen interest in the market with a number of deals in discussion.
“From the policy perspective there has been a clear realisation within various circles that the housing sector needs to be propelled through various mechanism for investment to go into the sector; jobs have to created if the economy has to get back to the growth trajectory of 8-9 per cent and for that housing has to play a significant part. If you see it in the last six months, whether it was Land Acquisition Act, whether it was Regulator Bill, whether it was REIT guidelines, suddenly there was plethora of activities and buzz happening in the Finance Ministry and also about the measures that can be taken to get the economy back on track. I believe some of these developments have the ability to change the market dynamics significantly,” says Sandhir.
PK Tripathi, President, Unitech says the most important aspect of the business is financing which should be addressed. Demand is increasing and with the number of regulations coming, it will be all the more difficult to raise funds. So, when demand will increase and supply will not be in a position to match that, then the prices will go up. So, option like REIT is coming up but this is one of the fund raising products, other such products also need to come up especially for buying the land.
“I would even suggest financing for land purchase. Land is something that can not go anywhere. So, even if you are getting 50 per cent finance for that it can ease the liquidity crunch of the developers. You are not allowing finance for buying the land, you are not allowing the foreigners to invest in the company even as equity partner; I fail to understand why real estate is not being treated like any other industry,” says Tripathi.
Navneet Bhadla, Director, Brys Group says the sector has waited for long and in 2013 the news has been that NRI money would come into the sector. It was more of an expectation which did not materialise. She feels it became a news point when the rupee depreciated and there was too much of noise around it, but the depreciation of rupee has hurt the sector.
“With elections ahead and the government having the last chance to put the economy back on track I feel some of the liquidity concerns of the sector would be addressed with the budget. Instruments like REIT will also see the execution on the ground with clear taxation policies and all this makes me optimistic that 2014 could be a game changer year,” says Bhadla.
Neeraj Bansal, Partner-Real Estate & Construction with KPMG India agrees to this. According to him, NRIs also need stable currency to enter the market because a lot of NRIs who had earlier invested were pretty uncomfortable with the rupee depreciation. “In any market where the sentiments are low and the currency is volatile no one wants to enter that market. It is not that money has not flown in, but many of them preferred to park it in fixed deposits than real estate,” says Bansal.
“The moment you launch a new project, a significant amount of investment goes into that project, and when your project gets delayed it affects your overall cash flows, whereas when you deliver a project the liability is shifted from your balance sheet,” says Gaurav Gupta, Managing Director, SG Estates. “Moreover, launches here are also a function of the release of land in the market. Hopefully it will start getting released from the next year and by that time the cash flow of the developers will also be better than now.”
So, the 2013 may have been the year when both the developers as well as the lenders were waiting for policies like the REIT to roll out as well as other cost & benefit analysis. However, the direction in which the market is heading to, added with the new funding sources being cleared by the government, it seems the turnaround of the financial fortunes is just ahead in 2014.
