As private equity firms and banks are adopting a cautious approach to funding real estate projects, non-banking finance companies (NBFCs) are coming forward to help cash-strapped developers with the expectation of higher returns, say experts.
Industry experts also say NBFCs are keener on investing in residential projects than commercial units mainly because of lower risk and quicker returns.
"Currently sales are low in most of the major markets, which has impacted cash inflows. Developers who have earlier taken loans have repayment liabilities," Knight Frank India executive director for capital transactions group Rajeev Bairathi told PTI
"Since they cannot take loans for repayment, they are now looking at NBFCs. These NBFCs are also coming forward to bail out developers to retire their loans."
After the recent RBI directives tightening bank funding to realty sector, banks have been very conservative on lending to real estate projects. Owing to several risks such as clearance issues and lower sales, as asset bubbles, PE firms are shying away from investing in real estate projects, he said.
The rates of interest charged by NBFCs are typically around 18-19 per cent for early stage financing and 15-16 per cent for inventory financing, which is more than 12-14 per cent of bank interest. PEs on the other hand expect 25-30 per cent returns on their investments.
"NBFCs are blending caution with keenness for lending to realty projects. Higher rates of interest, availability of hard assets as collateral, and ability to trap sales proceeds or cash flows in escrow accounts are principal reasons for NBFCs' interest in lending to real estate companies and projects," IndoStar Capital managing director and chief executive Vimal Bhandari said.
Along with the established players such as HDFC, DHFL, LIC Housing Finance and Kotak, there are a number of new ones such as Indostar Capital Finance set up by Ashmore Group, Piramal Capital, the NBFC set-up by the Ajay Piramal Group, the NBFC floated by the Xander Group, and Edelweiss Capital, which are active in real estate lending.
"From a PE market perspective, over the past 5-7 years, most development projects have suffered huge cost and time overruns," Xander Finance chief executive Amar Merani said.
"This is due to issues including aggressive and unrealistic underwriting, delay in approvals, limited execution capability of most real estate developers, regulations that were purposely kept grey or selectively applied to help rent seekers and promote collusion, and finally the general economic sentiment itself," Mr Merani added.
Mr Bhandari further said funds were increasingly preferring somewhat lower return secured structures to higher return pure equity structures.
"While banks remain the primary source of capital, total lending by RBI regulated NBFCs to developers is estimated to be around Rs. 8,000 crore," he said.
NBFCs are preferring residential projects to commercial, mainly because the risks involved in the former are much lower.
"With commercial real estate at the lowest ebb due to low offtake in the leasing market the prices of rentals are actually going south. Coupled with this the construction cost has been steadily climbing. Hence commercial real estate has become financially inviable," said Shreekant Shastry, vice president for strategy and business development at realty firm Ozone Group.
"Further, due to huge migration to cities the demand for affordable and mid segment housing is very large. This is the segment which is very stable and generating large volumes. Hence most of the lenders prefer mid-segment housing," he said.
Industry experts also say NBFCs are keener on investing in residential projects than commercial units mainly because of lower risk and quicker returns.
"Currently sales are low in most of the major markets, which has impacted cash inflows. Developers who have earlier taken loans have repayment liabilities," Knight Frank India executive director for capital transactions group Rajeev Bairathi told PTI
"Since they cannot take loans for repayment, they are now looking at NBFCs. These NBFCs are also coming forward to bail out developers to retire their loans."
After the recent RBI directives tightening bank funding to realty sector, banks have been very conservative on lending to real estate projects. Owing to several risks such as clearance issues and lower sales, as asset bubbles, PE firms are shying away from investing in real estate projects, he said.
The rates of interest charged by NBFCs are typically around 18-19 per cent for early stage financing and 15-16 per cent for inventory financing, which is more than 12-14 per cent of bank interest. PEs on the other hand expect 25-30 per cent returns on their investments.
"NBFCs are blending caution with keenness for lending to realty projects. Higher rates of interest, availability of hard assets as collateral, and ability to trap sales proceeds or cash flows in escrow accounts are principal reasons for NBFCs' interest in lending to real estate companies and projects," IndoStar Capital managing director and chief executive Vimal Bhandari said.
Along with the established players such as HDFC, DHFL, LIC Housing Finance and Kotak, there are a number of new ones such as Indostar Capital Finance set up by Ashmore Group, Piramal Capital, the NBFC set-up by the Ajay Piramal Group, the NBFC floated by the Xander Group, and Edelweiss Capital, which are active in real estate lending.
"From a PE market perspective, over the past 5-7 years, most development projects have suffered huge cost and time overruns," Xander Finance chief executive Amar Merani said.
"This is due to issues including aggressive and unrealistic underwriting, delay in approvals, limited execution capability of most real estate developers, regulations that were purposely kept grey or selectively applied to help rent seekers and promote collusion, and finally the general economic sentiment itself," Mr Merani added.
Mr Bhandari further said funds were increasingly preferring somewhat lower return secured structures to higher return pure equity structures.
"While banks remain the primary source of capital, total lending by RBI regulated NBFCs to developers is estimated to be around Rs. 8,000 crore," he said.
NBFCs are preferring residential projects to commercial, mainly because the risks involved in the former are much lower.
"With commercial real estate at the lowest ebb due to low offtake in the leasing market the prices of rentals are actually going south. Coupled with this the construction cost has been steadily climbing. Hence commercial real estate has become financially inviable," said Shreekant Shastry, vice president for strategy and business development at realty firm Ozone Group.
"Further, due to huge migration to cities the demand for affordable and mid segment housing is very large. This is the segment which is very stable and generating large volumes. Hence most of the lenders prefer mid-segment housing," he said.
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