The rate at which economy is growing our urban centers shall add at least 100 million people by year 2020 merely on the account of urbanization. To provide housing to so many people India needs to invest a trillion dollars over the next 10 years. This is equivalent to 80 times our education budget allocation for year 2011-12. While in the short-term there are concerns related to over-supply in certain markets the long-term outlook on an aggregate level is positive from institutional perspective.

Valuations is always a concern in a growing economy, India is no different. It becomes difficult to reach a common ground where interests of both investor and seller are aligned. The current environment presents a good opportunity for PE players to get in a deal on reasonable terms. Most of the investments are happening at a project level rather than entity level where PE players are able to secure their investment while eyeing above normal returns.

Finally sentiments for real estate are exemplified by the preference given to it as an asset class which corners more than 50% of the investment bucket of an average Indian national. Current tepidness is a short term down cycle which the sector will come out of as global conditions improve. Larger problems with the sector are in fact related to serious land title issues, long approval cycle, use of malpractices in execution and lack of financial depth in financial intermediaries which need considerable public-private participation to address comprehensively.

Private equity with long term capital is allowing developers to withstand short term cash flow pressures. Despite this being a much more expensive capital than any form of debt, developers accede to it as it allows them to scale up, build professionalism, obtain sophisticated advice and enter new markets. Many a time association of a PE player with a project also adds to the marketability as customer is assured of the financial discipline and corporate governance standards demanded by such financial institutions.

As we look at it, this is a symbiotic relationship which developers have started to appreciate due to reasons other than capital. On the whole it works to the final customer’s advantage who is assured of his investment and product quality, the benefit of which accrues to the project’s bottomline.

It has been a difficult market to be in as a developer. Rising interest rates have impacted the customer interest in new properties moderating the flow of new funds and in addition to that high inflation and rising commodity prices have increased substantially the delivery cost for existing projects. Saddled with pressure to deliver on their previous commitments and fraught with balance sheet liabilities due to financial imprudence, developers are desperately seeking new channels of money.

Traditional funding channels such as banking, public markets have largely become out of reach as financial institutions do not want to increase their already high levels of exposure and public market listings in real estate have performed rather poorly.

With a long term play in mind Private Equity players are keen to capitalize on this need gap. According to reports PE funding into real estate has gone up from USD 480 million in Q1 2011 to USD 504 million in Q2 2011, which are at significantly higher levels when compared to figures for the same period last year.

Professional investors look at combination of three key factors, market opportunity, valuations and sentiments. Long-term opportunity in real estate sector exists and is in the same bracket as the other unfulfilled fundamental needs such as healthcare, education and infrastructure. There exists a huge supply deficit which the country faces today. National Housing Board estimated a shortage of 25 million homes by 2012-13.

]]> http://www.track2realty.com/road-ahead-for-pe-funding-in-real-estate/feed/ 0 http://www.track2realty.com/real-estate-financing-and-investments-market-predictions-for-the-next-12-months-2/ http://www.track2realty.com/real-estate-financing-and-investments-market-predictions-for-the-next-12-months-2/#comments Tue, 30 Aug 2011 11:54:14 +0000 Track2Realty http://www.track2realty.com/?p=3722 The only constant is change. This has been an axiomatic truth for the Indian real estate market over the last 24 months, with volatility having become a byword to describe it. There has been little or no respite from this state of flux.

The US and European debt worries have added to the uncertainty. Over the last two months, the Indian real estate market has been beset by reduced growth expectations a potential tightening of the liquidity squeeze. This is an unsettling time for the market, and obviously for real estate investors as well. Are we looking at 2008 all over again?

With the escalating global liquidity issues, these are challenging times. Over the next 12 months, we definitely expect these sentiments to reflect in the financial profile of the Indian real estate sector. It is a certainty that banks will enforce selective lending with stricter verifications. Interest rates will stabilize, but liquidity will continue to be tight and the disbursal rate of home loans is bound to reduce.

Developers will be under pressure to reduce their debt-to-equity ratios. Fundraising through the QIP route will reduce, and we are going to see a decrease in real estate IPOs. Considering the current liquidity crunch, the proceeds from existing IPOs will be fully utilized for the completion of projects and repayment of debt.

These dynamics are going to lead to a very clear segregation of the sheep from the goats. In other words, listed developers with better disclosure standards, good corporate governance, better speed of project delivery and records of consistent dividend payments will see better share price performance. Simultaneously, the distressed projects of smaller developers will be acquired by medium-to-large players at prices that will be significantly lower than their original valuations.

With banks and institutional lenders becoming more cautious about lending to the real estate sector, demand for capital from private equity funds and NBFCs will increase. Meanwhile, the risk appetite of private equity investors will reduce further. Those that will continue to invest will display a preference for core and core-plus type investments, and smaller residential projects within and in close proximity to the city limits of our metros. Realty funds are expected to focus more on HNIs and family offices in domestic markets for fund raising.

The high interest rates, increase in vacancy and demand slowdown will impact the earnings of developers. A natural consequence will be a slowdown of construction activity, leading to fewer new launches, and also delayed project delivery. Once again, we are going to see developers resorting to the a volume-led strategy rather than focusing on margins. In this respect, at least, the scenario that is strongly reminiscent of 2008-2009.

Margins will in any case be squeezed by the increased construction costs brought on by inflation. This means that a number of developers will miss their pre-launch targets. We are likely to see pre-launch projects coming with at 10% to 15% discount over the pricing of other projects in the same areas.

Nevertheless, unsold residential stock will increase further. Many developers will sell their non-core land and divest their stakes in non-core businesses such as hospitality and retail. Given the proposed land acquisition bill and impacted funding scenario, developers will go slow on land banking and focus on the joint development route.

Significantly, SEBI is expected to come out with a separate set of guidelines to regulate real estate private equity and FDI into the real estate market. The objective of this increased scrutiny is obviously to reduce the incidences of real estate being used as a tax haven. The RBI is also expected to review its standpoint on standard provisioning and risk weightages for loans to the real estate sector, and lay out tougher due diligence standards for banks with regards to sanctioning loans to the sector.

The author, Ramesh Nair is Managing Director – West India, Jones Lang LaSalle India

The US and European debt worries have added to the uncertainty. Over the last two months, the Indian real estate market has been beset by reduced growth expectations a potential tightening of the liquidity squeeze. This is an unsettling time for the market, and obviously for real estate investors as well. Are we looking at 2008 all over again?

With the escalating global liquidity issues, these are challenging times. Over the next 12 months, we definitely expect these sentiments to reflect in the financial profile of the Indian real estate sector. It is a certainty that banks will enforce selective lending with stricter verifications. Interest rates will stabilize, but liquidity will continue to be tight and the disbursal rate of home loans is bound to reduce.

Developers will be under pressure to reduce their debt-to-equity ratios. Fundraising through the QIP route will reduce, and we are going to see a decrease in real estate IPOs. Considering the current liquidity crunch, the proceeds from existing IPOs will be fully utilized for the completion of projects and repayment of debt.

These dynamics are going to lead to a very clear segregation of the sheep from the goats. In other words, listed developers with better disclosure standards, good corporate governance, better speed of project delivery and records of consistent dividend payments will see better share price performance. Simultaneously, the distressed projects of smaller developers will be acquired by medium-to-large players at prices that will be significantly lower than their original valuations.

With banks and institutional lenders becoming more cautious about lending to the real estate sector, demand for capital from private equity funds and NBFCs will increase. Meanwhile, the risk appetite of private equity investors will reduce further. Those that will continue to invest will display a preference for core and core-plus type investments, and smaller residential projects within and in close proximity to the city limits of our metros. Realty funds are expected to focus more on HNIs and family offices in domestic markets for fund raising.

The high interest rates, increase in vacancy and demand slowdown will impact the earnings of developers. A natural consequence will be a slowdown of construction activity, leading to fewer new launches, and also delayed project delivery. Once again, we are going to see developers resorting to the a volume-led strategy rather than focusing on margins. )In this respect, at least, the scenario that is strongly reminiscent of 2008-2009.)

Margins will in any case be squeezed by the increased construction costs brought on by inflation. This means that a number of developers will miss their pre-launch targets. We are likely to see pre-launch projects coming with at 10% to 15% discount over the pricing of other projects in the same areas.

Nevertheless, unsold residential stock will increase further. Many developers will sell their non-core land and divest their stakes in non-core businesses such as hospitality and retail. Given the proposed land acquisition bill and impacted funding scenario, developers will go slow on land banking and focus on the joint development route.

Significantly, SEBI is expected to come out with a separate set of guidelines to regulate real estate private equity and FDI into the real estate market. The objective of this increased scrutiny is obviously to reduce the incidences of real estate being used as a tax haven. The RBI is also expected to review its standpoint on standard provisioning and risk weightages for loans to the real estate sector, and lay out tougher due diligence standards for banks with regards to sanctioning loans to the sector.

The author, Ramesh Nair is Managing Director – West India, Jones Lang LaSalle India

Real Estate Finance can be defined as a branch of finance, which deals with investing money or wealth in real estate. Real estate finance deals with the allocation, generation and use of monetary resources over time, which is invested in the real estate business.

Like any other aspect of finance, real estate finance also has risks associated with it and the effective management of assets, which will maintain or increase in value over time, i.e. the investment yield of the project.

Real estate investment essentially means investing in immovable properties such as land and everything attached to it such as buildings, also known as properties. The difference between a real and personal property is that the there is the right for the transfer of title to the property in question whereas right to personal property or ownership to personal properties cannot be transferred.

Real estate investment can be viewed as a handsome business opportunity as real estate can be pledged as collateral to secure a loan for a business venture, to offset otherwise taxable income through cash savings on tax-deductible interest rate losses or rental income can also be derived from a real estate property.

A common example of real estate financing is an individual owning multiple pieces of real estate of which one can be used his primary residence and the others can be rented out. Profits can be reaped from real estate financing as a result of appreciation of real estate property prices. This is known as capital gains from real estate financing.

“This division has been established specifically to service companies that are not into the real estate business and yet have real estate holdings, be they leased or owned,” says Ambar Maheshwari, Managing Director – Corporate Finance, Jones Lang LaSalle India.

Every business is functionally into real estate, but not every business has the expertise required to make sound business decisions about its estate holdings. Traditionally, all Indian corporates have parked funds in real estate when they have excess liquidity, especially when they perceive the property market to be depressed. During times of market improvement or when they require liquidity to rake back into their business, they tend to monetize their real estate holdings.

“At the stratum of companies for whom real estate is not a core business focus, such real estate dealings have been taking place from a gut-feel, promoter-driven perspective rather than in a manner that focuses in on an organized utilization of cash flow,” clarified Mr. Maheshwari. “Such a perspective can only come with a sound understanding of the real estate sector, which is extremely important when it comes to addressing the shareholder value issue. Real estate is a substantial asset class, and unless corporates optimize the returns their real estate portfolios yield, shareholder value is compromised.”

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India, says, “Real estate as an investment and asset class has existed in India almost forever. However, this sector has also been limited in many respects by a severe dearth of information. JLL Corporate Finance will assist corporates to make informed decisions about acquiring, disposing of or optimally utilizing their real estate, regardless of whether they occupy it or have acquired it purely from an investment perspective.”

Depending on market dynamics, geographic specifics and the business typology, buying or selling a land parcel may not be the best possible option for a corporate – even if the real estate market is on an apparent upswing. Based on a professional analysis of the corporate’s real estate portfolio, an expert advisory can come up with the best solutions which may be a joint venture, a strategic partnership with a developer or occupier, or conversion into a full-fledged income-generating asset via sale/lease-back transaction.

When it comes to such focused services, there is currently a huge gap between what is required and what is being offered on the marketplace. While IPCs already service a large variety of stakeholders in the market, these stakeholders tend to primarily consist of real estate developers and occupiers. Advisory entities that currently service corporates who are not into real estate are accounting firms, investment banks and boutique financial players. Such entities generally advise corporates on various shareholder-related issues – and while real estate may be one of the advisory aspects, they are invariably ill-equipped to offer expertise-based insights into this area.

“Considering that optimal value creation for shareholders is a key concern for large companies, and that real estate is an extremely significant asset class, this aspect needs to be addressed by experts and not via proxy by non-specialist agencies,” says Mr. Maheshwari.

STRATEGIC TIMING
JLL Corporate Finance is being launched at a very considered point phase of Indian real estate. The market in India is at a very nascent stage, but nevertheless has achieved greater depth than ever before. Today, there is a much wider swath of participants whose requirements need to be addressed. Five years ago, an IT company that aimed to execute a lease/buy-back transaction for their real estate portfolio would not have found too many interested parties. For instance, insurance companies are still governed by IRDA norms and cannot acquire real estate as an investment asset class. Similarly, banking companies are limited from acquiring real estate by the Banking Regulation Act.

However, there is now a new breed of organized investors on the market who are actively scouting for transactions of this nature. They include private equity funds, domestic funds and NBFCs who can structure a deal in a manner which will allows corporates a higher degree of monetization of real estate assets.

A number of overseas players are now routing capital specifically earmarked for investment into Indian real estate, which has gained significantly in stability, risk-adjustment and income generating potential. There are going to be some profound changes is the manner with which capital finds its way into Indian real estate over the next 2-3 years. Real estate-specific corporate finance is clearly a concept and service whose time is now.

RECENT CORPORATE FINANCE REAL ESTATE DEALS:

• Jet Airways to enter into development agreement with Godrej Properties for its 2.5 acre land at Bandra Kurla Complex
• Mafatlal Industries sold its 7.6-acre plot in Byculla to Gliders Buildcon, a subsidiary of Piramal Realty, for Rs.605.80 crore
• Borosil Glass Works sold its 18-acre industrial plot near Andheri-Kurla Road to Sheth developers for Rs.875 crore
• Kalpataru acquired Bayer Cropscience’s 100-acre land parcel in Thane

For a perspective of the opportunities in Indian commercial real estate, consider this – Manhattan in New York City has 450 million square feet of Grade A stock, while London has 200 million square feet. In comparison, India’s collective office space stock accounts for only 270 million square feet. This showcases the long-term potential for office space at all levels in India.

Very few of the world’s commercial real estate markets have undergone such a dramatic and rapid change in such a short span of time as India’s has. The next few years will see a quantum spurt in the services and knowledge sector, opening up tremendous opportunities for the retail investor.

INVESTMENT ROUTES
There are three ways to invest in commercial real estate – directly buy office space from a developer, buy shares of a commercial developer from the stock market, or invest in a real estate fund focused on commercial real estate. As the quantum of investment is usually huge, the prospective buyer needs to take more informed decisions.

Many developers, especially in cities such as Mumbai, are today offering smaller units of space (as small as 500-1000 square feet) in Grade A buildings. This is in sharp contrast to the scenario a few years back, where only much larger units were available – making it tough for a small investor to invest in office real estate. Investors considering retail space can now consider a multitude of affordable options in free-standing high street outlets or shops in malls.

The advantages of smaller units are two-fold:

• It is  easier to find tenants for them
• The premises can also be used for business by their owners if they happen to be of an entrepreneurial bent of mind

Today, even professionals like doctors, auditors and lawyers are buying commercial properties for investment and self use. Of course, HNIs also continue to plug huge amounts of money into high-ticket commercial properties in the quest for yield. Private bankers and wealth management firms confirm that their clients have actively started investing in commercial properties after staying away in 2009 and 2010. These investors have bought into commercial properties because they seek assets that can protect their portfolios from inflation and stock market volatility. On their side, banks are willing to lend up to 50-60% of the LTV to buy commercial properties, subject to the borrower’s adequate net worth and established ability to repay.

WHAT TO LOOK FOR
Despite the availability of more rationally priced options, investing in commercial real estate is most definitely not child’s play. It requires forethought, research and planning:

• Investors need to establish the soundness of the location and its demand/supply dynamics. If they do not engage in sufficient research, they may end up buying into micro markets which have or will have high vacancies.
• They need to ensure that the economy, job market and population growth in the market is healthy
• They need to check the developer credentials, potential for infrastructure development, access to public transport and quality of property management in the project
• They need a knowledgeable real estate agent and a lawyer who can give them sound advice
• If they are investing in a retail store, they need to consider the frontage, foot-fall and the dynamics of the adjoining catchment
• Entrepreneurs who wish to buy commercial real estate for self use should ensure that the amenities in the project that match their business needs

If an investor is looking at an income producing office asset, he should look at:

• The break-up of cash flows
• The vacancy factor
• Expenses such as maintenance, property tax and building insurance
• Lease term, lock-in period and expiry dates
• Long term capital appreciation potential
• Refurbishment, refinancing and repositioning potential

WHY INVEST?
The rental yield for commercial property is usually 9-12%. In contrast, the yield for residential property is much lower at 3-4%. The demand for office space in India is likely to stand at around 200 million square feet over the next five years. Post the GFC, the prices across most markets dropped around 35-40% and have bottomed out in most markets, offering investors a good opportunity to buy into commercial real estate.

India’s macroeconomic growth story makes for a rather compelling reason to get one’s own paragraph into it somewhere. Chosen prudently, and office real estate can let you do that in indelible ink. Last year, the demand for office space across India was 30 million square feet – 50% higher than it was in 2009. The possibility of diversifying one’s portfolio, the sheer pride of ownership and the benefits of the longer leases that typify commercial tenants are other reasons to look at commercial real estate investing.

Remember, you do not only make a profit on the sale of appreciated commercial property – the rental cash flows of a well-located office or shop space are considerable. Unlike in residential property, the income that can be generated from commercial property is what determines its value. In other words, the capitalization rate is actually the measure of the demand for the property. For those who do their homework well, investing in commercial property is a high-adrenaline and high-returns game that residential real estate investment cannot hold a candle to.

The author, Ramesh Nair, is Managing Director – West India, Jones Lang LaSalle India

“It has been decided to permit SEBI ( Securities and Exchange Board of India )) registered mutual funds to accept subscription from foreign investors to meet the KYC (know your customer) requirements for equity scheme,” Mukherjee said while reading out the budget in the Lok Sabha.

“This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity markets,” he added.

Continuing with the focus on attracting investments to infrastructure, the finance minister also raised the cap on foreign investments into corporate bonds, issued by companies involved in the infrastructure sector.

India is planning to raise about $1 trillion during the 11th five year plan, which starts March 2012, to fund a huge infrastructure development programme.

To enable the flow of funds to the infrastructure sector, the FII limit for investment in corporate bonds with residual maturity of over five years issued by companies in the infrastructure sector is being raised of $20 billion taking the limit to $25 billion.

This will raise the total limit available for foreign investors in corporate bonds to $40 billion.

Also, while there is a high projected supply, there is a distinct dearth of appropriately priced projects in the low-to-mid income segments.

The RBI’s raising its lending rates will add to the stress already building up, and hasten the inevitable correction of at least 15-20% in the pricing of residential properties in the overheated central areas of these cities. This correction was previously expected to happen in 6-8 months.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has suggested the government to introduce Real Estate Investment Trust and Real Estate Mutual Fund to enable investors to own a diversified portfolio of professionally managed assets in the real estate sector. In a note submitted to the government, the Chamber said that the Indian Real estate sector currently lacks any monetization vehicle for capital intensive verticals such as commercial offices and retail malls. Further, since the funding requirements for real estate projects are significant, broad based portfolio investments by individual investors is not feasible. A possible solution could be created in the form of REIT and REMF.

These vehicles are primarily characterized by their investment in real estate assets as well as limited liability for unit holders and they generally engage in professional real estate management as well. REITs have enabled small investors in most developed economies to hold a diversified portfolio of real estate assets which would otherwise not have been feasible. USA, Australia, Japan and Singapore are the amongst the more developed REIT / REMF markets, with the necessary regulatory framework in place and significant representation of such listed instruments on their respective stock markets.

ASSOCHAM has also suggested the government to make it mandatory for developers to provide Home Information Packs to their customers. These packs carry copies of documents related to clearances, deals, valuations, development plans, implementation milestones, and impediments, if any. Such initiatives can also act as confidence building measures, especially in India where real estate transactions are enshrouded by various surprises, controversies, disputes, and a subsequent loss of satisfaction and trust.

The Chamber said considering the magnitude of socio-economic value the real estate industry creates for the country, India’s vision for 2020 needs to be closely linked with our vision for this industry. A more prosperous India in 2020 will be characterized by a better-organised real estate industry which is transparent, efficient yet well-regulated and focused on sustainable development.

The prudent fiscal measures taken by the Reserve Bank of India the strength of our domestic demand and the restructuring measures taken by the real estate development community helped the industry reposition its focus and ride through a period of unprecedented turbulence. However, the fruits of growth have to also reach the common man in semi-urban and rural areas, and not just be restricted to a few big cities. As a country, our needs are changing. Looking at the demographic changes, it is a challenge to handle the escalating pressure on our current infrastructure and build new infrastructure to keep pace with our urbanization and population growth.

Setting up of a regulatory authority and an appellate tribunal will help organizing the industry, but only if they are efficient and enablers for the industry’s progress. In the developed economies, government regulations promote planned development without acting as hindrance. A real estate regulatory body (called real estate commission in some countries) licenses developers, agents and price evaluators, on the basis of their competence gauged through common qualifying exams.