Distressed Real Estate – Invest or Avoid?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

The aftershocks of multiple disruptive policy reforms and structural changes continue to ripple through the Indian real estate sector. While its visible transformation from unorganized to organized and opacity to transparency are indubitably positive, we cannot help but count the fatalities of this process.

Many real estate developers are finding it extremely difficult, if not impossible, to realign their businesses to the new norms. It’s not just a question of compliance, but also the fact that the new real estate development norms call for massive capital infusions.

The practice of raising interest-free monies via pre-launches now more or less a thing of the past, interest rates are hardening and the banking sector is not especially well-disposed towards lending to developers.

Simultaneously, investors who had depended on heavy cash components for their resale properties have been left in dire straits by demonetization and the concerted drive towards financial transparency.

Many developers need to sell their hung-over inventory in a hurry – either to raise funds for new projects or so that they can cash out and leave the business. Likewise, many investors or other property owners are also desperate to exit their holdings.

And as is usually the case, one man’s loss is inevitably another’s potential gain. The current state of the market certainly presents a window of opportunity for smart property buyers who can make the most of it.

Today, there are plenty of distressed properties available on the Indian real estate market. The available opportunities include retail assets, hotels, individual residential units and even entire housing projects. With proper due diligence and the appropriate capitalization, one can actually strike a gold mine.

However, one still needs to know what one is doing, and also follow some very necessary precautions before entering into a distressed property deal.

Is this the right time to buy distressed properties? 

With rising population in urban areas (more than 10 million people migrate to Indian cities and towns every year, and India’s urban population likely to surpass 800 million by 2050), there is a significant inherent demand for homes, offices, malls and other real estate asset classes.

In the current market conditions, many distressed assets are available at attractive valuations and it may not be a bad idea to seal a deal. However, one should not do this without a clear plan of action on how to utilize or monetize the acquired asset.

Aspects to investigate before acquiring a distressed property:

  • Reasons for the distress sale 

It is extremely important to identify the reason for why a property has become distressed, to assess if they involve policy changes (which may affect the new owner as well), financial troubles or wrong intent. The latter is the most difficult to identify and tackle, and so must be investigated with utmost care.

  • Existing debt

A distressed property buyer must do a thorough check on the existing debt which the new buyer will assume. In addition to the overall quantum, one must segregate such debt into short-term and long-term, and also understand if the debt is backed by any security or otherwise.

  • Physical condition

However attractive the valuation may appear, the physical condition of the asset to be purchased plays a key role in its inherent value to the new owner. Regardless of whether the buyer plans to refurbish and release/sell and/or demolish and rebuild the property, this check is important to assess the cost implications.

  • Law adherence

A prospective buyer of a distressed property must ensure that the asset is developed as per the stipulated regulations, including FSI permissions, statutory approvals, fire safety norms, and many more. If there is even a faint hint of a violation, the buyer must understand the risks and have a plan towards mitigating them.

  • Litigation check

The buyer should check for litigations that embrace the distressed asset. It should be commercially viable to own the property despite the existing litigations, and the buyer should have the knowledge, means and a plan to overcome such issues.

  • Title clarity

A clean title is a must for the hassle-free future transactions or development of the purchased asset.

  • Lease contracts

If a buyer is acquiring a pre-leased asset, it is imperative to check the lease contracts and their expiry dates so that they can be factored into future financial projections.

Conclusion

The momentary pause and panic in the real estate sector of a country whose GDP likely to reach $5 trillion by 2025 can certainly be viewed as an opportunity by large global investors who are looking to enter into or expand in India.

However, such players are not gamblers and will always ensure that they have the benefit of an experienced India-based consultancy to identify opportunities as well as their accompanying risks and required mitigation plans.

Individual investors, on the other hand, bear the onus of due diligence while acquiring distressed assets.

It should be clear that a well-meditated play in distressed property can reap rich benefits, while an inadequately researched acquisition can result in a severe financial setback and even legal complications.

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Indian Real Estate’s IPO Revival

Shobhit Agarwal, MD & CEO – ANAROCK Capital

A decade ago (in 2007-08), prior to the global financial crisis hitting D-street, the Indian initial public offerings (IPO) market gave a stellar show with overall ₹41,300 crore funds raised, making India the 5th largest market in volume and 7th largest in value terms.

Then the capital markets crashed in after the global economic slowdown in 2008, and the numbers fell as low as Rs 2,030 crore.

The consecutive years also saw a limited number of IPOs being filed by companies. However, 2017-18 saw the resurrection of the Indian IPO market. As many as 45 companies resorted to raising much-needed capital via the IPO route.

A record of about ₹82,100 crore has been collectively raised by these companies – a whopping three-fold jump from previous years’ ₹28,200 crore and almost double the 2007’s IPO figure.

Strong domestic liquidity, the resilient Indian economy, the surge in foreign institutional investors and improving investor sentiments have pushed the IPO charts northwards.

Indian Realty – pre and post global recession

Prior to the global financial apocalypse that shook the world including India, the real estate sector was at its peak. Till then, the wave of financial liberalization allowed banks to give credit to large-scale borrowers – resulting in a sharp rise in foreign capital inflows and domestic liquidity.

Post-2013, the story changed and the previous roar of Indian real estate first sank to a murmur – and then, more or less, fell silent. The liquidity crunch coupled with high inflation and execution delays compelled housing buyers to postpone their purchase decisions. This naturally impacted housing sales and property prices, leaving developers with huge piles of unsold inventory.

Battling massive negative cash flows, many developers also failed to deliver their promised projects. Things worsened when high-risk provisioning was assigned to the real estate sector when various realty firms either defaulted or faced bankruptcy. Banks became reluctant to lend to developers as they were already burdened with non-performing assets (NPAs).

IPOs as an alternate source for cheap capital also slowed down because of weakened consumer sentiments to the backdrop of deteriorating builder reputation who failed to live up to their promises, causing buyers to feel the brunt of delayed delivery of projects.

Many builders then resorted to overseas funding, private lending and qualified institutional placements (QIPs) which allowed only listed companies to raise funds, and non-banking finance companies (NBFCs) which charged steep interest rates.

Deciphering the BSE Realty Index

The BSE Realty index which reflects the performance of the top-listed real estate players was at its peak until 2008. After that, the index witnessed a slump due to weak macroeconomic conditions, rising unemployment and declining real estate demand.

However, the recent spate of reforms including DeMo, RERA and GST have helped the market conditions improve due to increased transparency and accountability. With this, the realty index also seems to be heading north now.

Till date, around 16 private realty players and two Government-owned real estate companies have opened their shares to the public. Of this, DLF (issued in 2010) owns the highest issue size of ₹9,000 crore till date. In the consecutive five year period, from 2011-16, there were no large-scale IPOs issued by big real estate players.

The recent IPO filing by the Government-owned Housing and Urban Development Corporation (HUDCO) in May 2017 and National Buildings Construction Corporation Limited (NBCC) in April 2018 received manifold subscription due to their diverse businesses.

While HUDCO emphasizes financing urban infrastructure and housing, NBCC has a hard focus on civil construction projects, civil infrastructure for the power sector, and real estate development.

Realty IPOs Gaining Momentum

To the considerable relief all stakeholders, the struggling real estate sector is now stabilizing to some extent.

As a result, real estate IPOs are also gaining momentum. Reports suggest that Mumbai-based Lodha Developers Limited, Thane-based Puranik group and Bengaluru-based VBHC Value Homes are planning to raise funds through public offerings.

One predominant factor contributing to this spurt is the improving economic parameters, including GDP growth rate. Also, RERA implementation in 2017 raised the confidence of investors and end-users of real estate.

After decades of disorganized eccentricity, the Indian real estate sector is transforming into an organized one, with improving transparency and accountability providing a new ray of hope.

Good times ahead? 

Looking at the record-breaking number of IPOs in 2017-18, the current fiscal is also likely to remain robust with numbers, suggesting that India Inc may collectively raise over Rs 2,00,000 crore in equity and equity-linked offerings – and IPOs take centre-stage.

Real estate IPOs, which had taken a backseat over the last few years, are once again getting ready to ride the revival wave.

ANAROCK’s research also clearly highlights the increasing real estate absorption momentum with a Q-o-Q rise in housing sales across the top 7 cities. The stage is set and the actors are primed for a massive IPO push over the next few years.

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A Closer Look at Distressed Property Auctions

Shobhit Agarwal, MD & CEO – ANAROCK Capital

We often hear of banks auctioning off seized distressed properties, and how such properties can be lucrative investments as they come at very attractive prices. Studying the market of distressed properties is not very easy, but there are some areas of predictability.

The ‘supply’ of distressed properties is usually closely linked to the prevailing economic situation. Severe market setbacks or stock market crashes can result in an unusually large infusion of distressed properties in the market.

In a normal or vibrant economic situation, the availability of such assets is much lower. Less than 8% of Indians who have borrowed from a bank to acquire a residential property will default on their home loans unless there are exceptional circumstances involved.

How do properties become distressed and go to the auction block?

A homeowner is considered to be in default when he or she is behind on the agreed-upon EMIs for three consecutive months or more.

When a home loan is in default, banks do not seize the assets of the borrowers immediately. They send a notice to the borrower highlighting the missed EMI repayments, and that they will take strict action if the situation is not remedied.

Banks do understand the various reasons why a borrower may have defaulted on EMI payments, which include financial crisis, serious health setback, loss of job, a family crisis, etc.

These are facts of life, and banks do not make themselves unapproachable to defaulting borrowers who state such reasons. Once the buyer has explained the reasons or they are otherwise evident to the bank, an offer to restructure the EMI and extend the tenure of the loan is made.

A borrower may ask for a grace period on the basis of a good repayment record for loan repayments and that interest rates have increased beyond affordability. The borrower can ask the bank to refinance the loan, resulting in reduced EMIs over and increased tenure period.

The defaulting borrower may offer to liquidate other assets such as fixed deposits, insurance policies or mutual fund investments in order to repay the debt. He or she may even sell the property themselves to pay back the amount instead of letting the bank take over and auction it.

If these measures help the borrower to catch up on the outstanding EMIs, the property will not come up for auction. Auctions happen only in extreme cases – and even then, the borrower may not incur a total loss.

If the property is sold within three years of its purchase, the borrower is entitled to a profit on the sale after the bank has recovered its dues. If three years have elapsed since the property’s acquisition, the owner is still entitled to tax exemption benefits.

If the borrower is still unable to pay back the principal amount and interest on a home loan after 90 days, the bank will classify a home loan as a Non-Performing Asset (NPA) and will seek to recover the complete home loan amount.

To do so, they will seize the borrower’s assets and/or the mortgaged property. They are authorized to do this under the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests) Act to protect their interests.

Even at this stage, the banks may not go as far as auctioning off the property, preferring to resolve the borrower’s issues by further easing the repayment process and burden for the borrower. Only when all these measures fail will the bank proceed with selling the property.

The Process of Property Auctions

At this stage, the bank will take the defaulting borrower’s property into its possession and seek to dispose of it under the guiding factors of the SARFAESI Act.

The process begins when a borrower’s home loan account is classified as a ‘chronic’ NPA – one where no other form of resolution is possible. The bank will issue the borrower a 60-day notice, which is technically a reminder to the defaulter stating the issue and the factors that have led them to this point in full detail.

If the defaulter does not respond during this notice period, the bank proceeds with the auction of the property. Even in this period, the borrower has the option of resolving the issue or raising an objection to the notice.

For instance, the bank will specify the property’s fair value and the borrower can object if the property is perceived to be undervalued or if he or she has an alternative to pay off the pending dues to the bank.

The banks must then serve a fresh 30-day notice period to auction the property, and the subsequent notice will include all the relevant details of the sale. Finally, the property is auctioned and the outstanding amount is recovered.

The process of bank-auctioning itself is, however, quite cumbersome and lengthy. The bank will first advertise the upcoming property auction on a given date, assimilate the various offers and then determine the final buyer.

The process can get prolonged even further if the buyer intends to acquire the property via a loan, either from the same or a different bank or financial institution. Also, all intending buyers need to be fully vetted and the final transfer of ownership is subject to a NOC by the pertinent housing society.

Are distressed property auctions a good investment bet?

It is true that properties on sale via bank auctions can be bought at prices which are significantly lower than the prevailing market rates in that particular area and for that particular property size and type. However, it should also be borne in mind that the base price for a property on auction is a function of the outstanding loan amount in question.

In other words, the longer the current owner has been servicing the home loan, the lower will be the base price of the property. If the current owner is only a few EMI cycles short of complete repayment, he or she will seek to restructure the loan on the property instead of allowing it to be auctioned off.

Getting to know of such opportunities is not hard. The public will be informed quite efficiently when an auction for single or multiple seized properties is to take place, as the bank will advertise the fact along with all pertinent details online and in leading dailies.

Distressed properties and their scheduled auctioning will also be mentioned in a bank’s annual report under the category of bad debts. Interested buyers may also turn to trusted property consultants who will apprise them of distressed assets on the market, and what the expected price range will be.

The primary potential advantage to buying a distressed property being auctioned by a bank is obviously the possibility of getting an asset at a potentially lower price than the prevailing market rates for such a property in that particular location. Another plus could be the potential for securing a property in a prime location.

Also noteworthy is the reduced burden of due diligence since the auctioning bank will already have established that the property is legally sound in all aspects. Notably, the property would come up for auction only after the previous owner has exhausted all available avenues to stay the proceedings, and no longer has any legal recourse.

Challenges

There are some potential challenges to investing in properties being auctioned by banks. In the first place, there is no single database of such properties to consult. Secondly, it is impossible to anticipate what the highest bid for any given property will be, so there is no assurance of acquiring a particular property one is interested in.

In any case, buyers need to be very familiar with the exact process involved before, during and after buying a distressed property. The process of buying distressed property on auction is only complete when it has met with the expectations of both the auctioning bank as well as the property’s previous owner.

If it hasn’t, there could be legal problems even after the property is legally purchased by its new owner. Also, the buyer must have a complete understanding of the ownership history of such a property and needs to ask for all the pertinent paperwork. This is important in case the new owner seeks to sell the property again at some stage.

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Returning FDI Equity Scripting India’s Real Estate Revival?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

As India rises to greater prominence on the world map, global corporates are more eager than ever to participate in the country’s growth story.

A GDP growth rate of 7% plus, a population base of over 1.2 billion and an urbanization rate northward of 30% are irresistible investment magnets, and real estate development remains a key focus area.

India opened its doors to FDI way back in the 2000s, and since then not only much-needed capital but also critical expertise has flowed in. No doubt, the subprime crisis of 2008 led to a decline in foreign fund inflows; however, today the situation has turned and certainly looks upbeat.

The real estate sector was among the main beneficiaries of the opening up of FDI into the country and has transformed significantly as a result. In the past few decades, it has metamorphosed from an unorganized, closely-held business to an increasingly organized and a corporatized one.

The recent structural changes including demonetization, the crackdown of Benami transactions, RERA and GST may have had short-term negative impacts, but they also encouraged the inflow of foreign funding which always reacts favourably to signs of increasing transparency, accountability and financial discipline.

Global investors certainly approve of the new regime, and their applause for the Government’s moves has taken the best possible form – namely a massive increase in the FDI equity inflows, especially into the development of self-sufficient townships, housing and supporting infrastructure.

A quick look at the statistics by the Departmental of Industrial Policy & Promotion (DIPP) indicates that just in nine months of FY 2017-18, FDI equity inflows into construction development rose by around 250% over the levels of FY 2016-17.

This sector has also been a key recipient of dollar-based FDI equity, accounting for around 7% of the total infusion between April 2000 to December 2017. Of course, the FDI equity that flowed into this sector between April-December 2017 does not beat the high levels witnessed in 2012-13 and 2013-14.

However, the decisive return of foreign funding has certainly turned the tide for the construction development sector, which was swimming against the negative currents of subdued demand and disruptive policy changes over the past few years.

Other positives to this revival:

  • The rise in FDI equity inflows indicates that global players are once again willing to back the sector. This is solely because the business environment has changed positively because of the RERA regime and other regulatory changes.
  • In the past few years, debt transactions more or less ruled the market, as investors were not sure of whether equity investments would fetch the desired returns. In fact, not a few investors got burned in the previously unregulated market environment. The return of FDI equity is not only a big positive to the sector which will help to improve developers’ leverage ratios – it is also a resounding vote of confidence in the sector.
  • The rise in FDI is a lead indicator of a positive future for the Indian real estate sector – which, as everyone knows, is a critical component of the country’s economy. The Indian real estate sector is the country’s second-largest employer, has thousands of allied industries and presently contributes 8-9% to the country’s GDP.

We have more than enough reason to feel upbeat about the improvement in FDI equity inflows into the construction development sector. Nevertheless, we cannot forget that this is a revival, not a tidal wave of growth. In other words, the Government has to ensure that the exuberance does not fade away.

It can do so by:

  • Enforcing a tighter control regime and constantly monitoring all mechanisms to ensure that there are no stutters in the system set by the current regulator.
  • Taking decisive punitive actions against defaulters to send a strong message to global investors that the watchdog is alive and kicking.
  • Providing more benefits and incentives, and easier processes to seek larger foreign investments. While the improvement in the ease of doing business ranking from 130 to 100 is a big positive, the Government has to
  • Maintain a consistent upward learning curve and communicate new evolutionary developments to the world.
  • Widening the investment avenues by bringing the benefits of the organization to more real estate sub-asset classes such as rental housing development, student housing and senior citizen living.

Only time will tell if the revival of FDI equity inflows into the construction development sector is sustainable and will culminate in a full-fledged comeback.

The macroeconomic fundamentals are surely encouraging, and if the latest policy initiatives stand strong and result in even more regulatory refinements in the future, we will certainly see the next wave of development announce the arrival of India 2.0 to the world.

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HVS And ANAROCK Join Forces To Tap Into India’s $210 Billion Hospitality Market

PRESS RELEASE

HVS And ANAROCK Join Forces To Tap Into India’s $210 Billion Hospitality Market

  • Partnership to boost HVS India’s annual turnover by up to 75%
  • Multiple big-ticket hotel funding, divestments & acquisitions already underway

Mumbai, 17 May 2018: India’s leading real estate services firm ANAROCK Property Consultants today announced its partnership with HVS, the global hospitality sector leader. As a new business vertical under the ANAROCK Group, HVS ANAROCK will focus on brokerage, feasibility studies, operator searches, appraisals, executive search and other hospitality sector consulting and advisory services throughout South Asia.

Anuj Puri, Chairman – ANAROCK Property Consultants takes on the added role of Chairman – Hospitality at HVS ANAROCK and the Firm’s soon-to-be-appointed CEO will report to him. Shobhit Agarwal, MD & CEO – ANAROCK Capital will head the transactions vertical at HVS ANAROCK.

Stephen Rushmore Jr, President and CEO – HVS, commented, “We are very excited to partner with ANAROCK as we share a strong professional and cultural fit. Together, we foresee rapid expansion in the region and will be able to tap into more resources to serve our clients better than ever. India has always been an exciting market for us, and we are targeting a concentric outward growth into the hottest South Asian markets from here. HVS India has had more than two decades of exposure in the country, and we anticipate the partnership will leverage ANAROCK’s proprietary real estate funding platform to increase HVS India’s revenues by up to 75% over the next two years.”

Anuj Puri confirmed that ANAROCK is in the process of rapid expansion in terms of both geographies and business verticals, and the launch of HVS ANAROCK dovetails perfectly with these plans. “HVS is the leading global hospitality player, and we have aligned our synergies to tap into this market in India and beyond,” he said. “Tourism in India is growing by over 15% annually, and the launch of HVS ANAROCK coincides with some of the most exciting times for the Indian hospitality industry.”

Shobhit Agarwal has already concluded hospitality-specific capital markets deals worth over US$ 2 billion in his previous assignments across key markets. “There is a huge number of funding, divestment and acquisition deals to be tapped into, and HVS ANAROCK already has excellent relationships with India’s leading hospitality operators,” he said. “Over the past four years, India has seen some 4-5 major hospitality-related deals annually, with leading private equity players being active participants on the funding side.”

About HVS:

Thousands of hotel owners, developers, investors, lenders, management companies, and public agencies around the world rely on HVS to support confident, informed business decisions. Since literally writing the book on how to value a hotel in 1980, HVS has evolved into the global hospitality sector professional services leader by continually providing its clients with unrivalled hospitality intelligence.

Today, HVS has a team of more than 300 people located in over 50 offices throughout the world who specialize in all types of hospitality assets: hotels, restaurants, casinos, shared ownership lodging, mixed-use developments, spas and golf courses, as well as conventions, sports, and entertainment facilities.

For further details please visit www.hvs.com

About ANAROCK:

The ANAROCK Group is India’s leading specialized real estate services company with diversified interests across the real estate value chain. Anuj Puri, the Group’s chairman, is a highly-respected industry veteran and India’s most prominent thought leader in the real estate domain. He has over 27 years’ expertise in leveraging Indian and global real estate opportunities.

ANAROCK Group’s key strategic business units are Residential Broking & Advisory, Capital Markets and Investment covering debt, equity and mezzanine funding, and Research & Consulting. The ANAROCK Investment arm operates an industry-first proprietary investment fund to bulk-purchase residential inventory, enabling consumer sales at significant discounts.

ANAROCK’s growing business teams account for 1500 of the real estate industry’s most qualified and experienced professionals. With operations across all major Indian markets and dedicated services in Dubai, ANAROCK also has global business coverage via 80,000+ hand-picked channel partners. Every facet of ANAROCK’s rapidly-expanding business portfolio is governed by the Firm’s core assurance to its clients and partners – Values over Value.

For further details please visit www.anarock.com

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Will The Banking Mess Impact The Real Estate Sector?

Shobhit Agarwal, MD & CEO –  ANAROCK Capital

From bad loans to loan defaulters to financial frauds and embezzlement, the Indian banking system seems to be in a crisis mode. And, needless to say, it will have a cascading effect on most sectors – including real estate.

To build a project, developers largely rely on banks for their capital needs. Alternately, they seek customer advances to proceed with construction. If they are not adequately funded, their projects either go belly-up or are delayed extensively, causing disruption in the entire property-cycle.

Much to the dismay of developers, the recent events in the banking industry have caused commercial banks as well as Non-Banking Financial Companies (NBFCs) to become more cautious about disbursing heavy loans to real estate developers.

Numbers suggest that bank lending to the real estate sector came down from 68% in 2013 to a mere 17% in 2016 due to mounting NPAs.

Despite the continuous efforts by the Central Government to strengthen public sector banks by infusing bonds and launching regulatory reforms (recapitalization), the piling up of bad loans and NPAs is hurting public sectors banks.

In June 2017, the share of bad loans was around 10% of the total loans disbursed by the banking system.

Simultaneously, the gross non-performing assets had grown by nearly 190% (~8 lakh crore) in December 2017 from ~3 lakh crore in March 2015. As a result, banks’ credit growth is now at an all-time low since 1951. This will have repercussions on the real estate sector in the short to mid-term:

  • Cash-starved developers face further heat:

The current banking crisis has pushed several banks into hyper-vigilance about disbursing loans. The few leading developers who have good previous track records are unruffled, but banks are refraining from lending to smaller developers.

This inevitably puts pressure on such developers, who are already cash-starved and under immense pressure to complete their ongoing projects.

Under RERA, builders need to complete their project on time to avoid penalties. As a result, they are either being wiped out or seeking alternate funding via private equity or other NBFCs which offer to fund at significantly higher interest rates (nearly 18%-21%, as opposed to bank loans which come at 11%-13%).

This extra burden will inevitably be passed on to prospective homebuyers in the form of increased property prices.

  • A setback for affordable housing:

Despite being accorded infrastructure status by the Government, affordable housing projects are likely to suffer due to the ongoing banking mess.

To avoid a further crisis, most banks have laid down stringent lending norms; as such, banks are refusing to fund even projects that fall under the affordable housing category due to the mounting NPAs in previous years.

This could seriously derail the Government’s ambitious project ‘Housing for All by 2022’ mission.

  • Impact on property prices:

With banks being extra cautious and literally pulling out of the property market, private equity players and other financial institutions have come to the rescue of several Indian developers. The current numbers indicate that nearly 75% of the funding in real estate is via the PE route.

These options are eventually expensive for developers who, in turn, pass the buck to property buyers by increasing property prices. If banks proactively extended credit to developers at subsidized rates, it would eventually help keep a check on property prices as well.

  • Property cycle stagnation:

With banks shying away from lending to developers, the property cycle may grind to a halt across cities. There are several under-construction projects that need funding for completion. For instance, NCR has maximum project delays due to the severe cash crunch.

With banks refusing to give funding to many developers there, these players are unable to complete their projects. If banks offered them credit, their projects would be completed and the development cycle could resume – which would ultimately lead to a faster revival of the sector.

On the Positive Side

The recent crisis is paving the way for several structural changes within the Indian banking system. For instance, the RBI unveiled a new charter of rules early this year for recognizing defaulting loans and ways to resolve the crisis.

More so, the passing of the NPA ordinance in 2017 empowered the RBI to directly intervene in bad loans and thereby go some ways in resolving the NPA deadlock.

An overall reduction in bad loans will eventually encourage banks to issue fresh loans to credible players. With a healthier banking system, the economy can also begin firing on all cylinders again.

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ANB Capital Merges With Anuj Puri’s ANAROCK Property Consultants

ANB Capital Merges With Anuj Puri’s ANAROCK Property Consultants

Shobhit Agarwal to head new entity as MD & CEO – ANAROCK Capital

Mumbai, 8 May 2018:  Anuj Puri, Chairman – ANAROCK Property Consultants and Shobhit Agarwal, MD & CEO – ANB Capital Advisors today announced the formal merger of ANB Capital with the ANAROCK Group to create ANAROCK Capital, which Shobhit Agarwal will head as MD & CEO.

The ANAROCK Group’s residential services division has already defined itself as India’s leading, fastest-growing and most disruptive consultancy in the industry. With the addition of the Capital Markets vertical, ANAROCK takes a major step forward towards its ambitious expansion plans.

“The Indian real estate market is in its next evolutionary stage, and perfectly primed for ANAROCK Capital,” says Anuj Puri. “The firm will fill the massive real estate investment banking advisory gap that exists in a market completely redefined by RERA in terms of how the market operates and who will operate it going forward. Among several other functions, ANAROCK Capital will advise on big-ticket funding, acquisition and consolidation mandates. Shobhit’s vast experience and deep-rooted industry relationships will come into play with immediate effect. I take particular pride in announcing the second merger of equals in my professional life – and more are to follow.”

Shobhit Agarwal has been a prominent deal-maker in Indian real estate capital markets for over two decades and looks forward to taking the massive stakes involved to the next level. “Our capital markets team consists of well-honed industry experts who are adept at handling multimillion-dollar capital mandates,” says Agarwal, who has already traded capital in excess of US$ 10 billion in his previous assignments. “Leveraging the ANAROCK Group’s tremendous market penetration and superb operational infrastructure with 10 operational offices in India and 1 in Dubai, ANAROCK Capital will lead the real estate investment banking business from the front. There is over US$ 150 billion of capital to be traded in Indian real estate over the next 5 years – and with our collective expertise, existing exposure and resources, we are perfectly poised to capture a major share of it. ”

Building on ANB Capital’s existing strengths and expertise, ANAROCK Capital will provide services in real estate investment banking, financial management of big-ticket mergers, acquisitions and restructurings.

The firm already provides capital advisory services to some of the country’s leading corporations, institutions and state governments, based on a unique business model that eliminates the conflicts of interest inherent to large, multi-product financial institutions and multi-vertical international property consultants.

About ANAROCK Property Consultants Pvt. Ltd.: 

The ANAROCK Group is one of India’s leading real estate services company having diversified interests across the complete real estate value chain. With a professional career spanning over 27 years, the Group’s Chairman – Anuj Puri – is India’s most prominent thought leader in the real estate industry. He is regarded as one of the most respected and acknowledged experts on India’s real estate opportunities both in India and across the globe.

ANAROCK Group’s key strategic business units comprise of Residential business: broking & advisory services to clients; Investment business: debt, equity and mezzanine funding and Research & Consulting business. The ANAROCK Residential business teams comprise of industry’s finest residential real estate professionals who understand the ever-changing consumer needs and market trends. ANAROCK’s Investment arm has built a revolutionary business model of bulk-purchasing residential apartment inventory through a proprietary investment fund. With a growing team of 1500 professionals, ANAROCK operates in all key property markets across India including Mumbai, Navi Mumbai, Chennai, Bangalore, Gurgaon, Noida, Ghaziabad, Hyderabad, Kolkata, Pune and international presence in Dubai. ANAROCK is committed to consistently deliver optimal value to our clients from the base of our core promise – Values over Value.

Visit: www.anarock.com

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Will Foreign Investors Be Attracted To Indian REITs?

Internationally, all mature real estate markets have successfully implemented a REIT regime.

REITs as an investment vehicle have enabled public and institutional participation in the real estate asset class through exchange-traded units while also enabling greater liquidity and funding by accessing public markets.

Internationally many institutional investors, sovereign and pension funds, financial institutions and multifamily offices are subscribers to REITs allowing them to successfully diversify their investment portfolio while also providing access to a stable income stream.

Globally, US, Australia, France, Japan and the UK are the top five markets for REITs. There are now 37 REIT markets Japan and Singapore being significant markets in the Asia region.

A key consideration for investment into REIT instruments is the returns and the yield spread with the risk-free rate of return, in most cases the bond yields on long-term government securities for that particular country.

In Singapore the yield spread average over the past 5 years has been over 400 bps, which tells the story of how the S-REITs (how Singapore REITs are referred to) with the average returns over this period from REITs being 8.4 percent (dividend yield + capital value appreciation), clearly riding clear of the global economy tantrums and major political events.

Even in 2016, S-REITs gave dividend returns of 7 percent which were higher than those in Australia and Japan.

While we may be a little far away from an actual REIT listing in India, the revisions in regulations clearly indicate that institutional as well foreign investors are being courted most aggressively for the product when it is finally listed and offered for subscription.

Currently, the Indian government’s 10-year bond yields are at north of 7.0%. Stable, income generating assets are currently trading in the 8-9% yield range. With an average capital value appreciation of 4 to 5%, REIT returns should be around 11 to 12%, a similar spread of 400 to 450 bps as seen in Singapore.

With currency hedging costs, these yields will drop by around 5 to 6%, bringing REIT yields to around 6 to 8%, which would be similar to established REIT markets and interestingly lower than Fixed Deposit rates in India.

Only investors who entered the market in 2011 and 2012 when the rental recovery was still underway and capital values had bottomed out hold enough play to ensure their REIT listings find a good market response.

It is this conundrum that will affect global investors. Also, many investors are entering the market now; with more money chasing a lesser number of core assets, property yields have dropped to 8 to 8.5% levels.

These entry levels with slower capital value appreciation and associated lease tenancy risks and relatively higher risk weight of India is likely to find difficulty in attracting foreign investors for REIT issues.

A healthy capital value appreciation amid rising rents for quality assets may still allow for REIT yields to be favourably benchmarked for some.

The current strategy being adopted by a few large institutional and pension funds of undertaking development risk by getting into brownfield development allows them this leeway that creating core assets going forward will provide them with enough headroom to offer REIT yields that will be attractive to foreign investors.

A future environment of falling interest rates and lower government bond yields will also offer enough spread for foreign investors to sink their teeth into the Indian REIT pie.

An improving regulatory environment with better investor protection as evidenced by India’s improving rank in World Bank’s Ease of Doing Business rankings in 2017 is a precursor will also give higher confidence to investors.

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Exploring Co-Living And Is It Investable?

Data technology interfaces, proptech and future of work are the latest buzzwords in the real estate sector. However, they are merely enablers in an environment that are being influenced by millennials at a frenetic pace.

Millennials are the true disruptor and bigger than any other trend!

Already millennials are junking the age-old conventions of usual working profiles and putting down roots in a particular location or city. They are the ‘digital nomads’ of today.

Their integration and participation in the global workforce have already up-ended conventional office formats and coworking has spread like wildfire. It is the sense of community, kinship and social interaction that is now finding resonance in the concept of ‘co-living’.

But these are not just passing trends. There is a sense of economics, independence and creating a diverse, social circle that are driving these alternative working and living concepts.

Co-living, in essence, is a curated, shared living space managed by an operator who pays greater attention to the community he is creating within the space. Designed with interactive common areas, all the security measures and monitoring devices, these are essentially a rental accommodation with a modern twist.

While not explicitly advertised, the target is the younger generation, which is keen on creating multiple communities within its social life.

Beyond all the community living noises, comes the rational concept of affordability. For students, young, unattached professionals who are looking to move between cities and even countries, these could end up being more affordable while retaining the flexibility of smaller duration contracts and a hassle-free, maintenance and upkeep as part of the deal.

The ease of a single licence fee or cheque covering the stay and utility bills, near zero deposit and flexible lease tenures and no furnishing costs are the highlights of experiencing a co-living environment. The mutually agreeable living mates and community gatherings are an added bonus thrown in.

With the rising population of young professionals and students in key global cities such as Hong Kong, Singapore, Sydney and others around the world, co-living as a workable model has been gaining momentum over the past 2-3 years.

There are many well-known firms who are creating a portfolio of such co-living properties. Most of these firms are still local to their cities and communities. Some of the well-known names are WeLive, Common, YOU+ in China, Campus Hong Kong etc.

In fact, there are four operators in India as well – a couple of them being coHo.in based out of NCR and Netsaway in Bangalore. India has a huge student population and over 42% of its population falls in the 18 to 34 student and young workforce demographics.

Keeping in mind the fact that its metros are quite expensive locations, especially cities like Mumbai, where buying houses is prohibitive and even rental accommodation does not come cheap and has a lot of riders attached it, this concept has huge significance in the larger cities of the country.

Already some operators run a healthy co-living accommodation inventory and have found good traction from the young workers and students.

This is still an evolving concept globally and so investment activity is only in its infancy.

But this asset class does offer low entry barriers due to its evolutionary phase and investors could look at increasing their rental yields by a good 12 to 15%, which can be increased further by using leverage.

However, scale is a key element. Most of the co-living developments are spread over small or mid-sized buildings with an adequate number of rooms.

There would be additional expenses needed for renovations, furnishings and upkeep. Also, risks associated with smaller tenancies, local licencing laws would be critical factors in determining the viability of the asset class.

Though relatively an infant, this concept has its roots in the rental housing concept and if situated ideally near emerging industry areas, educational hubs and city centres by refurbishing older structures, has the ability to provide affordable and flexible living options for the millennials while proving to be an adequate return generating asset class.

Watch this space closely!

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Is Equity Returning To Residential Real Estate?

The storied tale of the Indian residential sector is likely to be a subject of fables.

How an unregulated sector which went from being a villain despite is social moorings to being held in the throes of a sector-shaking regulation that is likely to change the face of this asset class and how business is conducted by development players.

The compliances and reporting under RERA are going to separate the chaff from the wheat. A cleaner sector will bring out the moneybags.

The last 3 to 4 years have not been the best for the residential sector. Rising inventories, falling sales, consumer disputes, massive delays amid major media coverage – the sector was a much-maligned one.

The risk associated with litigations and the resultant downside drove equity away from this asset class and the money found safe shelter in the steadily growing commercial sector.

Despite this, money continued to be pumped into the residential sector, though most of it was going to the Tier I cities where the bigger, established and branded developers were present and most of this money was in the form of debt structures.

In fact, in the last two years, all of the investment flow into residential has been in the top three cities of Bangalore, Delhi NCR and Mumbai.

Also notable was the fact that while residential sector continued to receive a lion’s share of investments, equity structures made up a minuscule percentage (~4 – 5%) of these inflows over the past 4 years or so.

What is heartening to see is that within six months of RERA, most of the residential markets are sprouting green shoots of recovery. While supply has whittled down, sales momentum found some uptick in the last quarter of 2017 and prices have settled to a rational level.

More than ever, we are witnessing examples of smaller developers tying up with national players through Joint Development/Development Management agreements as the former face liquidity issues, no having the financial muscle to undertake residential projects under the current RERA mechanism.

The rising presence of established developers who are actually the most active during this period, sewing up land deals at attractive valuations bodes well for institutional participation. In fact, it is a good trend as these players have established credentials and have the ability to attract equity back to the fold of this asset class.

With the high levels of debt funding over the past four years, developers are over-leveraged and during these times of slow sales are missing out on making the interest repayments. They do not have the ability to take on more debt.

While such players may have to offload the project to a larger developer, investors would find greater comfort with established development entities and may be willing to explore structured equity transactions going forward.

We believe these times are still some time away, but the rising transparency levels and better corporate governance and regulatory oversight may pave the way for the return of equity to the residential asset class as money are now chasing quality rather than returns.

And do not forget, this sector has the ability to fulfil an almost unquenchable thirst for home ownership in the country with a significant shortage in the larger cities.

The right development partner and the optimal product in the current regulatory environment may just have investors breaking the bank again!

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