Indian Real Estate Market 2016 – Still Has Some Hopes

For Indian Real Estate Market, Year 2016 has started on good notes. With announcement by HDFC Ltd., India’s largest mortgage lender, about raising Rs.2,700 crore out of a Rs 5,000 crore, 12-year long-term fund that will invest in mid-income housing projects in the country. What’s most important is that this fund seeks to become equity partners with builders in today’s market where everyone else is very happy doing debt deals.

So what’s wrong with debt, you may ask?
With cash flows under massive stress, a builder borrowing at say 22% today will have a hard time servicing his payment obligations. So to try and bring down his cost of funds, he looks to another fund or NBFC to offer him a cheaper option, and provides an exit to the former fund. For some builders, it’s becoming a vicious cycle.
With equity, on the other hand, a fund has its skin in the game, equally. The builder-investor share the risk. The fund then is as worried about how the project is doing as the builder. It will have the opportunity to put in place checks and balances to ensure the project doesn’t go astray. It will have the opportunity to guide the builder where required, bring in property governance.
Most of these debt deals that happen in Indian real estate are short term ones, with repayments or exits usually happening within three years, sometimes in even under two years, much before the project is delivered.
Equity deals are usually for longer and when HDFC invests from its new fund, they will have 12 years.
However, the only unfortunate part about equity investing in Indian real estate is the baggage it carries. Most foreign funds that came into India after 2005 wanted to put in equity and did. But a large chunk of those deals with builders have had a litigious end, ruining their returns. These projects either never took off, or were badly managed by the builder-partners. Only a handful has had a profitable exit.
Suddenly, the nature of investing changed and debt took over. No one wanted to do equity deals because their confidence was shaken. They didn’t know if they could trust Indian builders, even the visibly good ones.
Let us hope 2016 will be the year when that lost confidence makes a comeback. Here’s to equity.
Source: ET

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