Track2Realty Exclusive: Kruti Jain, Director, Kumar Urban Development, believes any funding available in real estate is gap funding. It is not about only the gap which is there in funding for real estate because what happens for other industries is that they have this reserve capital which is not their land or raw material, but is the actual capital they put in to manufacture xyz product and then they replenish the funds with whatever returns are accrued.
Real estate does not have any such capital which replenishes except for the internal accruals for flats which is put into the next project immediately because developers want to build a brand and snowball effect. A realty project has some receivables, some outgoings, and some projects lagging in sales, and hence cash flow deficit.
“The problem starts when this so-called cash flow crunch or deficit culminated because you moved the receivable that you got from your flats and the construction loan into inventory of land which will develop in 5-6 years of time. The basic philosophy of funding is short term and long term which even I as a real estate developer understood very late. It is a standard practice in other industries because they actually have designated vehicles through which they can take long term and short term loans,” says Kruti.
Sunil Dahiya, Senior Vice President of industry body NAREDCO feels that around 2000 when the industry was just starting to emerge and there was a pent up emotion within the demography to pick up residential needs and invest, the banking could not synchronize itself with the sector. So banking did not see real estate as a lucrative investment. But around 2000-05, they realized that the consumption of loans was the maximum in the housing industry.
“We saw a lot of exposure from the bankers in the housing sector between 2000-05. All the private bankers started taking exposure in the projects at the customer level. It was at this time that the developers probably made the mistake of raising too much money through the IPO route. Why I say it was a mistake is because that exposed the developers’ balance sheet to say-I am in need of money to take the business forward to the next level,” says Dahiya.
Atul Modak, Head of Kohinoor City does not agree that IPO was a mistake, but believes to raise the capital the kind of land bank everyone has to create and for that again the kind of vulture fund that one has to explore and later the question is raised how the money is spent, that is very critical. In case of IPO, he feels people have gone berserk and then they created the problem. Other than that, he doesn’t think the IPO route is wrong to raise money.
“The problem is in copying what is happening abroad but what has happened to real estate in the US is because of the kind of funding they did. In India, whatever requirements are there, most of the developers are selling instead of leasing the properties because of the funding issues. At the same time most MNC’s are looking for commercial property on lease. If at all government or RBI has been stringent, it has been good in the recession period. Today, other industries are being funded for inventory, and if the banks start funding for the land, they will have some control over where that money is going,” says Modak.
…..to be continued
