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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Future Of REIT In India: Market To Be Approximately USD 46 Bn

REITs have been one of the highest discussed subjects over past few quarters and not without reason.

It can provide the much needed monetizing opportunity for the asset owners while providing investment options to pension funds, long-term investors and every individual who couldn’t take part in the real estate investment class due to the high capital requirement.

It takes away all major risks associated with real estate like delays, construction stoppage, corporate governance, lack of funding etc and provides the investor a direct access to income yielding professionally managed properties. So REITs are definitely a very important part of Indian real estate.

The Indian Government has played its part by easing all possible challenges linked to the REIT listing. It has relaxed all possible requirement for an easy launch of REIT.

In a recent step, it also allowed REITs to raise debt by issuing debt securities and also removed the minimum requirement of two assets. So from government’s point of view, I believe they have done enough.

In terms of size, we anticipate the overall REIT market in India to be approximately USD 46 bn, 50% of which can be reached in the first 3 years of the launch of the first REIT itself.

Close to 290 mn sq ft of REIT compliant grade A stocks are already available in top 7 cities. The key here is the first launch of REIT and its performance.

However, considering the delays in launches against expectations of all experts in the country, I believe one should be cautious on the timing of the launch.

I believe it will take 3 to 4 quarters before the first REIT gets launched in India. However, the performance of initial REITs will set the stage for the others.

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Attention Spreading Across Alternative Asset Classes

For decades, Indian real estate has focused on frontline asset classes i.e. office, residential, retail and hospitality. However, now the attention is spreading across alternative asset classes as well.

These are specialized real estate developments like senior living, student housing, education, warehousing and health care. Various developers have started focusing on these specific segments in recent years.

Various new funds are also in at different stages of getting launched. The increased focus from developers and investors is transforming the space from unorganized to organized.

Recently we concluded one of the largest logistics deal in Asia Pacific between Indospace and CPPIB.

We believe this is the beginning of the new investment era where these alternative assets classes will start gaining attention and funding which will encourage more players to get serious about such ideas and help those to become part of the recognizable asset classes.

Increased focus on such assets by developers would attract more funds towards it which will in-turn motivate more developers to join in. These will help in improving quality of the properties which should attract foreign operators in various fields like education, healthcare, warehousing and likewise.

In next few years, if the things progress as per our expectations, we will see various foreign players entering in India.

Till date, we have seen Indian universities getting setup in foreign countries; now foreign universities might start getting setup in India providing benefits to the students in India.

Also, focus on student housing can provide good quality residence options for the students allowing them a much better life.

 

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Private Equity Investment In Retail Gains Momentum In 2017

After almost 6 years of inactivity starting 2009, retail assets have started attracting Private Equity (PE) investments for the past 3 years.

The rise in interest is due to improvement in the country’s economy post-2014 which has translated into rising consumer confidence and hence, consumer spending.

With proper mall management strategies, one can generate good revenue in rising economy. This has resulted in higher PE investments in the country’s retail assets. Also, the average investment size has increased multifold showcasing the increase in investor confidence.

Further, with the REITs opening up, the investors have another option to monetize their assets and they can strategies well and create a portfolio that can enhance their overall valuation.

While the consumer spending has increased, it has not restricted to only metros and gone to TIER II cities as well. With fewer options to spend, consumers in TIER II cities love the mall culture even more.

Further, unlike real estate prices, pricing of branded goods doesn’t change with a change in locations. Hence, good mall management can generate good revenues for the malls. This has resulted in investors focusing beyond top 7 cities.

Another reason for venturing into TIER II cities is the possibilities of better bargaining compared to limited scope in metros. We believe, with the economy doing well and so are the malls, interest in good quality retail assets is here to stay.

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Real Estate Investment: Going Beyond The Top 7 Cities In India

PE investments in real estate have been on a rise since 2014 and it is growing every year. In INR terms, the investments have crossed the previous peak in 2007 by a good margin in 2016 itself.

However, the situation in this optimism is different than the one in 2007. The investment style is more towards long-term investments rather than opportunistic investments as in 2007 period.

The focus is more on track record and corporate governance of the developer partner compared to returns earlier. Investors are still remaining cautious in terms of equity in residential projects compared to free funding to any and every available opportunity in the previous phase.

But the key difference in this phase is the geographical spread of investments. In 2005 – 2008 phase, as high as 37 cities received investments which include places like Pondicherry and Kakinada.

Investors reached all the places that could offer good returns. Unlike that, post-2009, investors have largely stuck to top 7 cities with higher concentration to top 3 cities of Bangalore, NCR, and Mumbai and categorically stayed away from other cities.

Going forward, once the opportunities saturate in the top 7 cities, investors will start considering going beyond top 7. With RERA implementation and other government activities, the transparency in the sector is set to increase to boost investor confidence regarding investing in cities beyond the conventional ones.

However, we expect investors to remain cautious and study the cities and the developer partner in depth before entering into any deal. Also, while we expect investors to expand their horizon again, it will still be limited to the larger 7 or 8 cities, in addition to the conventional choices.

But for that, the developers in such cities need to be ready to have a track record that can fit in the investment criteria of the funds.

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Dubai Real Estate – The Promised Land For Indian Investors

Dubai has always been an attractive real estate investment destination for Indians, but the intensity of interest has increased considerably over the past few years.

As per latest data released by the Dubai Land Department, the quantum of real estate investments by Indian has reached INR 42,000 cr in the last 18 months alone – almost 40% higher than what it was in 2014.

Today, Indians are the largest foreign investors in Dubai real estate by a comfortable margin. While there are various reasons for such a high interest, the key attractions bear highlighting:

  • Attractive returns:

As per historical data, Indians can reap approximately 8 to 10% tax-free returns by investing in the Dubai real estate market – without a doubt, extremely attractive capital appreciation and definitely much better than what they can currently expect in many cities in India.

  • Ease of investing

As per the current RBI norms, an Indian can remit as much as USD 250,000  per annum to Dubai (or any other country) which effectively means that within just two years, an individual (just one year for a couple which clubs their remittances) USD 500,000 can be invested in Dubai – enough to buy a quality property there.

Further, the distance between India and Dubai is short and the frequency of flights is abundant, further adding to Dubai’s viability and attractiveness as a property investment destination.

  • High transparency:

Transparency plays a pivotal role in real estate investments, especially when investing in a foreign country. To illustrate, foreign investments into Indian real estate surged immediately after the announcement of RERA.

The Dubai real estate market has consistently been highly transparent in all aspects, making it very attractive for Indian investors.

  • Lower budget requirement:

Compared to Tier 1 Indian cities like Mumbai and Delhi, an investor needs to shell out far less for investing in the Dubai property market.

As per recent reports, the average property price per square foot in the central parts of Dubai is approx. INR 25,000, which is sizably lower than what one would have to invest in Central Delhi or Mumbai.

In other words, investors with less-than-spectacular budgets have the opportunity to invest in a highly lucrative market.

  • Investment churn:

In the past few years, the Indian stock markets have delivered high returns to investors. With every rise the risk of fall increases, which causes investors to book profits earned in equities and invest them in other lucrative asset classes.

Real estate, being an asset class which can absorb a sizable corpus, becomes a preferred choice – be it in Indian real estate or other lucrative options like Dubai.

In addition to the above, the issues that investors in Indian real estate have faced in the past decade in terms of delays in development, lack of exit options and high ticket sizes have also played key roles in this outbound investments.

If this scenario does not change or changes too slowly for the sensibilities of serious real estate investors, Indian investments into the Dubai real estate market will continue to grow.

 

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Tier 1 And 2 Cities To Gain Traction In Indian Real Estate Market

After the global financial crisis in 2007 – 08, we have hardly seen any investments by institutional investors into TIER II and TIER III cities of India. There were largely two reasons for this:

1) Lack of adequate governance and

2) Lack of demand.

However, as per our recent interactions, various institutions expect the first concern to by addressed thanks to RERA implementation.

The gap between the governance level of Grade A developers of TIER I and TIER II cities should come down drastically, making it a level playing field for all cities. This will leave us with the point 2 which is lack of demand.

While office demand will continue to remain  largely with TIER I cities, considering the availability of talent pool and facilities, residential space should come under investor attention, especially affordable housing.

The luxury residential demand will take time before rising again, but demand for affordable housing at right price is sufficient.

With the government also supporting affordable housing with various incentives, developers can increase revenue and profitability faster than ever before, if they focus on creating the ideal combination of offering and expectations.

As per our rough estimate, the residential market size in India for 43 Indian cities with more than 1 million population, apart from top 7 cities, is as high as INR 30,000 crore, which constitutes 40% of the residential market of the country, by value.

While individually, the market size is limited, as an aggregate, these provide a huge opportunity for investors and lenders as well.

This, along with the government’s focus on making real estate industry more transparent, and providing enhanced support for affordable housing, should bring more investment, as well, to these cities, subject to the developers improving their track record to fit into the foreign investors’ criteria.

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