To say that investors are anchors and project riders would be stating the obvious, even though a large section of developers would deny it.
In a cash starved business like real estate almost all the developers have their own set of lenders, investors, quasi equity partners and even informal crowd funding mechanism.
It has always been debatable as to what extent does it solve the funding woes of the sector and how much it gives these intermediaries a free run to make money and be catalyst to unaffordable housing stocks across the Indian cities.
The developers by and large do not admit this prevalent market reality, but some of them call it a financial compulsion to carry the business with investors as anchors.
There, of course, is flip side and it is quite challenging to live with investors as quasi equity partners. However, despite of disadvantages there is no denying that the developers in the present eco-system need investors.
Industry analysts maintain that the issue needs to be addressed with the very cause that facilitates investors’ entry into the business and their subsequent success. It is also suggested to look into the challenges of having investors as a necessary stakeholder.
Pranay Vakil, Chairman, Praron Consultancy suggests the reasons why the investors have thrived in this sector is something that needs to be debated because that is something which could lead us to look into the future.
Pointing out that investors are different than end users, he says the lenders are risk averse in this debt game because the lender is safe with his ROI of 18 or 20 or 25 per cent. The risk is with the investor who is taking the risk of prices moving up or down. So, because the lenders are risk averse the investors come into the picture and they are more suitable to the developers.
“The RBI does not allow the financing of the land. So, you won’t get any equity in land and then you go to investors who put in money into the land game, be it PE funds or joint venture or whatever. Moreover, all the developers, except of a few listed companies, are under-capitalised. So, the investor is nothing but a quasi equity. An investor does not mind getting into a project at a pre-booking phase which others won’t do. Even the lenders would ask whether the plan has been approved or not,” says Vakil.
Devang Trivedi, Managing Director of Progressive Group rather defends the presence of investors saying it is the ability of the developers to raise structured funds and it is the credibility of the developers to deliver. According to him, when the cheap funds are not available for the developers that is the starting point for the investors.
So, when the developers are not getting funds at the reasonable rates they go to these investors and it is win-win deal since the investor is getting higher returns and tangible assets are there as collaterals.
“The investor also knows that he can exit as and when he wishes to since entry & exit is at his convenience. It is happening across the markets now. Except of a few well-funded developers, 90 per cent of the developers have their own set of investors. Even the developers are today making deals for the investors’ changeover from one project to the other. And finally, it is the black money that can be easily absorbed in this business,” says Trivedi.
Girish Menghani, Vice President – Marketing with Omkar Realtors & Developers asserts that for the investor there is a better eco system now since the flow of communication with the developers has improved; there are professional agencies to help and guide them as to where to park the money. “So, while his risk has come down, he is getting higher returns compared to any other asset class or investment instrument.”
Beyond the developers’ defence and their cost & benefit analysis to have an investor as project rider, the fact of the matter is that the most important factor that has fuelled the fire is that the sector has given the highest return in the last 20 years. So, there are two kinds of investors – one is a rich guy who wants to park money and the other is the one who is buying a house and also investing with more than one project for the highest ROI.
In either of the cases, the developers manage to raise funds with the investors. They act as quasi equity partners of developers and are often project riders in the real estate market. This is one market reality that everyone within the built environment is aware of, but most of them prefer to deny it for obvious reasons.
