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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Budget 2018 Highlights: Real Estate Gets Wide Berth, Government Plays Balancing Act

The Union Budget 2018-19 was low on specifics but stressed on the roadmap laid down by the previous budgets of the government.

With no tangible benefits accruing for real estate on the broader points of industry status, GST reduction on under-construction houses or relaxation in personal income tax, there were, however, announcements from where some positive sentiment can be gleaned.

We look at the major announcements under different heads:

Real Estate – Affordable Housing, Property Transactions

The biggest real estate-related news was setting up of a dedicated Affordable Housing Fund under the aegis of National Housing Bank and to be funded by the priority sector lending shortfall and government authorised serviced bond.

Additionally, as per proviso to Section 50C of Income Tax Act, for immovable property transactions if the assessable value of the property for stamp duty calculations is within 105% of the consideration, then the transfer value shall be considered as the full value of the consideration, unlike the earlier provision, where higher of the two was considered. This will facilitate smoother property transactions going forward.

Agriculture, Rural Sector, Healthcare

As expected the focus was on agriculture and rural economy, with a major announcement for Healthcare where a National Health Insurance Scheme to cover 10 crore poor families (50 crore individuals) with insurance support of INR 5 lakh for secondary and tertiary hospitalisation is a precursor to a Universal Healthcare agenda.

Also with the announced increase in Minimum Support Price to 1.5X the production cost, the government seeks to improve income levels for farmers.  This has the ability to improve consumption levels in rural areas.

Logistics

The good news was on food processing and agri processing logistics parks. With the food processing industry growing at 8%, the outlay towards the sector has been enhanced to INR 1400 crore and under Operation Green, INR 500 crore has been allocated towards agri logistics and processing.

With the potential for India’s agri exports to increase to USD 100 billion form the current USD 30 billion, set up of mega food parks has also been announced. All this has direct linkage to development of logistics parks, cold storage facilities for the agriculture sector.

Within the education and healthcare sector, there is greater emphasis on higher expenditure for setting up universities and hospitals. This has direct linkage towards the alternative asset class, particularly in the creation of student housing, rental housing for medical tourism in newer locations.

Infrastructure

With the infrastructure story going strong and Smart Cities plan progressing at a decent pace, there are now 142 cities which are considered investment grade. This can put life in the moribund municipal bond market in India with such cities likely to be able to attract better response to their bond issues.

The focus on the development of secondary airports under the UDAN scheme, funding the expansion of airports using the Airports Authority of India balance sheet for fund-raising, redevelopment of 600 railway stations, we can expect more Transit Oriented Corridor developments and release of lands for commercial exploitation, providing opportunities for developers as well as investors.

There was also increased spending announced for strengthening the suburban rail network for Mumbai and Bengaluru (linking with Namma Metro) which enhances the focus on improving urban transportation networks.

The increased spending on Bharatmala (connecting the interior, rural and border towns) will also spur development of new logistics and warehousing corridors to service the peri-urban and rural areas which are witnessing increased consumer demand.

Investment Markets

The budget announced measures to ease VC Funding and AIF norms, which bodes well for domestic investment and fundraising going forward.

While there were no announcements with respect to REITs, we expect that with NHAI allowed to create an SPV for all operational roads under its control, such a portfolio might be of interest to global investors and we may also see an InVIT listing with these assets.

Long Term Capital gains tax has been re-introduced at 10% for gains above INR 1 lakh. This has the potential to increase taxation and disclosure related documentation while likely to have a slight dampening effect on stock markets’ performance.

With the easing of investment grade norms wherein BBB rating is also considered at par with investment grade for corporate bonds, many more companies will be able to access the corporate bond market to raise funds for their growth.

Push Towards Transparency And Digital Economy

The budget announced the allocation of unique Aadhar IDs to enterprises. Also, the government has increased spending under Digital India for skilling programmes for Artificial Intelligence, Machine Learning, robotics etc.

There was also a mention of Blockchain as a means of tracking transaction history and there is the likelihood of the government moving ahead on utilising this technology for linking bank accounts, benefit transfers and even land ownership records.

The resultant need for Big data and data warehouses will also spur the demand for data centres and is likely to see investments in this new emerging asset class going forward.

Corporate And Personal Tax

There was good news for the MSME sector as firms with annual turnover of up to INR 250 crore were to be taxed at a lower corporate tax rate of 25% from the earlier 30%.

This will benefit many small and medium-sized, local developers as well, allowing them some much-needed breathing space.

While there was no change to the personal tax slabs, standard deduction returned with INR 40,000 allowed for miscellaneous medical expenses and transport allowance.

On the flip side, 1% additional cess was announced for healthcare and education, taking total cess levy to 4%.

For senior citizens, a windfall was announced with no TDS payable on interest income up to INR 50,000. Also, they could claim an additional INR 50000 towards health insurance premium.

More money in the hands of senior citizens is likely to have positive implications for senior and assisted living residential formats.

Macro-Economy And Banking

India’s growth though blighted due to the demonetisation and GST implementation roadmap has managed to bounce back with the GDP growth at 6.3% in the second quarter of FY 2017-18 and forecasted to growth at 7.2-7.5% over the 2018-19 period.

Though GST revenue was received for only 11 months, the fiscal deficit managed to be at 3.5% for the current year, as the slack was picked up by the government over-achieving its disinvestment target.

With the bank recapitalisation process to infuse INR 5 lakh crore more into the banking system for lending, this is likely to kick-start the lending-borrowing cycle for many industries, which is the precursor to increased production and positive economic activity, leading to greater capital formation.

In Conclusion

This government has been making the right noises throughout its tenure about big-bang reforms. In fact, the Budget has been about giving specifics and/or updates about key reforms.

This budget was not anticipated to be big on announcements, but provide additional support to its larger agenda of inclusive growth and being industry-friendly.

While it misses out on key real estate sector expectations, it is a quite balanced document that seeks to address the concerns of the larger population and industry.

Overall Rating of Budget 2018-19 — 6/10

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Exploring Funding Options For Real Estate Developers

Shobhit Agarwal, MD & CEO – ANB Capital Advisors

The Indian real estate sector, within its evolutionary flux, has now been exposed to an array of complex financial instruments – and has come a long way from the basic debt or simple equity structures.

Not only that, the maturing of the sector has also opened multiple funding options for developers, especially in the commercial and residential asset classes.

Let’s examine some of the conventional and some unconventional funding avenues for real estate.

While construction finance during the build-out stage is quite accessible, the developer entity’s credit rating and banking relationships can help them get a higher amount at better than market rates.

With a large number of banks operating in this sphere, they are a standard mode of financing, with leverage also allowing for better returns over the project lifecycle.

For mature, income-generating assets, developers can avail of Lease Rent Discounting (essentially securitising the long-term lease rents of the asset to present value, obtaining funding at a rate of 8.5-9.0%, with Loan to Value of 60-70%).

An alternate structure being used is LTV of 80% with only interest repayments and principal repayment at maturity, allowing more play for the developer.

Within the domain of equity and debt structures, there is an allowance for a considerable amount of tweaking and customising as per the deal/asset under negotiation and the risk appetite of the investors.

What one must appreciate is that a lot of these structures are expected to undergo some changes as the regulatory environment has changed under RERA. Investors will exercise prudence to make sure their returns and principal amounts are not jeopardised in case of any violations or customer disputes.

Within equity, common equity holding structures are less used nowadays, while preferred equity is quite a common route. Usually, equity structures are linked to project exits based on expected Internal Rate of Return (IRR).

Structured equity transactions can also have a debt component as investors look to secure the equity position via a fixed coupon during the duration, along with an area share or a redemption premium component at a pre-decided IRR.

In the case of institutional investors, equity positions may be secured by the issuance of publicly listed NCDs or down-selling against a mortgage creation on the asset.  Developers with quality assets are at a considerable advantage.

In the area of debt structures, the most unique and customised solutions are tailored. In the residential asset class, debt structures have really flourished.

From senior secured debt to inventory funding to receivables bundling (securitising future receivables) and creation of ‘first charge’ on mortgaged assets or escrow mechanism on receivables, the modes of providing funding are quite unique for each transaction structure.

Developers can also access funding for land acquisition and during the approvals stage from the right financing partner.

Happy to have a chat on this anytime!

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Ex-JLL India Capital Markets MD Launches ANB Capital Advisors

PRESS RELEASE

Ex-JLL India Capital Markets MD Launches ANB Capital Advisors

Real estate-dedicated firm to focus on Capital Markets, Corporate Finance, Hotels & Hospitality, Land and Warehousing & Logistics

Mumbai, 24 January 2018Shobhit Agarwal, ex-Managing Director – Capital Markets & International Director of JLL Property Consultants (India) Pvt. Ltd., today launched ANB Capital Advisors Pvt. Ltd.

The firm, headquartered in Mumbai, will focus exclusively on various asset classes of real estate. Mr Agarwal heads a team of highly experienced real estate investment banking advisors with average 18–20 years of experience in structuring and executing both simple and complex transactions.

Already actively involved in several big-ticket deals, ANB Capital Advisors undertakes transactions under the ambit of investment banking business in the real estate industry.

The key focus is on capital markets, corporate finance, hotels & hospitality, land, and warehousing and logistics across India. The Firm works with developers, landowners, capital providers including private equity funds, banks, insurance companies and financial institutions.

“The capital requirements in Indian real estate are immense,” says Shobhit Agarwal, MD & CEO – ANB Capital Advisors. “To give a perspective, India still has a shortage of 18 million homes that requires USD 330 billion of construction funding. The existing gross bank credit to the sector is less than USD 55 billion. If we consider the larger sector beyond residential, the capital infusion requirements are virtually limitless.”

“Indian real estate is metamorphosing into a highly transparent industry into which all large global funds will want to enter aggressively,” he says. “Intermediary services in this space are very thin on the ground, and there is considerable scope for organized professional advisors. The launch of ANB Capital Advisors could not be better-timed, given the high deal flows in residential and office real estate.”

Commenting on the prevailing funding scenario in the Indian real estate sector, Mr Agarwal says, “Quality office assets available at attractive valuations currently attract the majority of equity investments. Residential will continue to look for financing options till equity investors focus more on this sector. In the GST era, there is also a lot of interest in warehousing and logistics. 2017 saw more than USD 4.2 billion of investments flowing into real estate, missing 2016 investments by a whisker. 2018 will be equally good – and if REITs launch this year, we can certainly surpass the 2016 numbers with room to spare.”

While there is equity and debt capital available, in most cases developers and funding avenues cannot connect with each other due to lack of resources, connections and intent.

Developers need services that precisely understand capital providers’ needs, while capital providers look for trustworthy intermediaries. ANB Capital Advisors brings to the table its strong connections and trust, enabling it to close almost all deals that pass the necessary due diligence.

The Firm’s strong relationships with both developers and capital providers have been created and nurtured through sustained efforts of its key members over their professional life.

Shobhit Agarwal himself has over 18 years of experience in the property finance and investment sector and has overseen several major cross-border real estate transactions. He and his team are highly experienced in structuring joint ventures, equity raising, debt advisory and advising on disposals and acquisitions in core markets.

About ANB Capital Advisors Private Limited:

ANB Capital Advisors is an India-based Real Estate Investment banking firm that advises on high-value investment banking transactions in the real estate industry. Its business focus is across asset classes in the Capital Markets, Corporate Finance, Hotels & Hospitality spaces, Land, and Warehousing & Logistics.  ANB Capital Advisors is headquartered in Mumbai and operates in the top 7 Indian cities as well as select Tier II and Tier III cities. With a current team strength of 10 highly experienced experts and a view to expanding to 25 by end-2018, ANB Capital Advisors works with the entire spectrum of developers, landowners, capital providers including private equity funds, banks, insurance companies and financial institutions.

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