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!