Real estate funding–the India story today
By: Shobhit Agarwal, Jt. Managing Director – Capital Markets, Jones Lang LaSalle India
Over the last year, there has been an unequivocal crystallization of Indian cities that continue to attract serious investment into real estate. This is directly correlated to the economic dynamics now working in the country. If India is to achieve even a conservative GDP growth of 6% per year, it emerges that only three cities – Mumbai, Delhi and Bangalore – have the potential to deliver. The reason for this is that close to 2/3rd of the overall development of office space in the country is now taking place in Mumbai, Delhi and Bangalore.
The Unbeatable Trinity
In fact, these three cities have been displaying an extremely fast pace of real estate growth exceeding 30% per annum. This means that they generate the bulk of employment in the country and therefore empower their citizens with the highest spending power. It follows naturally that the demand for commercial and residential real estate is also the highest in these three cities. Axiomatically, whatever capital is now chasing real estate in India is almost exclusively focused on Mumbai, Delhi and Bangalore.
That said, the days when international capital was seduced by the Indian real estate are over – at least for now. Today, it is only domestic fund companies and managers such as IndiaReit, Kotak Realty Fund, Red Fort Capital and ASK that are carrying the show. Global funds have turned a jaundiced eye on the Indian real estate story, largely because of the negative press and ongoing policy paralysis that continue to plague the sector.
The picture that this presents is not geared to attract global fund managers, who require a reasonable degree of stability and transparency before they venture into any market. Whatever FDI remains is very selectively allocated, and in close consultation with local investment agencies. On the other hand, domestic fund managers who are more informed and wired into the Indian real estate sector find the overall operating environment is extremely promising.
Rules Of Attraction
As things stand now in Indian real estate:
- · The cost of debt is north of 16% for construction and 20% for acquisition finance
- · Developers’ input costs are staggering, with the cost of construction per square foot up by at 20% over what it was last year
- · Property valuations are at what could be termed an all-time low.
At the same time, demand for the right projects in the right locations remains high. For domestic investment managers, this is the best time to invest into the sector.
Residential projects continue to be the high-focus area for the international and domestic funds that are still focused on real estate. However, they have clearly lost their taste for affordable housing. This yesteryear poster boy of the Indian real estate story has fallen off the capital markets hit parade because of the low returns it yields and the higher gestation period involved.
Likewise, luxury housing is also out of favour because the project sizes are not large enough to warrant FDI or attract domestic funding. Today, 80% of all available capital for real estate is being plugged into mid-income housing (projects with units price-tagged between Rs. 50 lakh to Rs. 1.5 crore).
At Jones Jones Lang LaSalle Capital Markets, the bulk of our business is currently happening via debt syndication through domestic funds. This is currently the most viable business model because these funds are secured, easy to handle and enable quicker execution from a developer perspective. Capital markets services are provided to developers based on their overall track record as well as the viability and marketability of their projects.
In order to increase his eligibility for funding in today’s market climate, a developer must be able to demonstrate a sufficient degree of financial discipline and accountability. For example, there needs to be verifiable proof to the effect that there has been no cross-usage of funds allocated to projects, and that every project represents a flawless case of financial closure.