Market Update : Cost of borrowing falls for real estate developers The rush of money and the competition among investors to close deals have softened rates, benefiting developers Property developers are increasingly able to borrow at cheaper rates as finance companies and private equity funds compete to extend capital to real estate projects, betting that a rebound in property sales will end a prolonged slump. The rush of money and the competition among investors to close deals have softened rates, benefiting developers who have been borrowing at steep rates from non-banking financial companies (NBFCs) and private equity (PE) as banks turned cautious in financing them in the last few years. Developers with good credentials and a reputation for timely interest payments can get capital at discounted rates, said Ravi Ahuja, executive director at property advisory Cushman and Wakefield India. “From 20-21%, the rates have come down to 17-18% as more money chases a few reputed developers,” Ahuja said. “As a result, even smaller developers today have relatively easier access to capital.” As banks became reluctant to lend to developers over the past three years, NBFCs and PE funds have offered lifelines in the form of debt financing or so-called structured finance deals with a debt-equity mix. Many PE funds that were unable to return money to investors after pure equity investments during the 2005-07 boom, opted for these debt-structured deals. Equity transactions may make a comeback if the Reserve Bank of India cuts interest rates next year, as is widely expected by economists. Lower borrowing rates may also stoke demand for homes, reviving the fortunes of real estate companies. Investors and analysts say that the real estate sector is gradually moving towards equity transactions again, in a higher return-higher risk model. “In the last 6-12 months, there has been a larger inflow of private capital chasing developers from different sources such as family offices, foreign capital, pension funds etc.,” said Vimal Bhandari, managing director and chief executive of Indostar Capital Finance Pvt. Ltd. Since more money has come into the system, there has been a reduction in yield that may lead to investors choosing to do either or both of secured equity and senior secured lending, Bhandari said. Typically, banks lend to developers at 13-15%, PE funds at 22-24% and NBFCs at 18-22%. While in the case of bank lending, the end use of money has to be specified, it is mostly not required in NBFC lending. The latter, however, adopt various risk-mitigating measures by insisting on quarterly interest payments, fixed returns and high collateral. “Deals at 20% and above are almost a thing of the past. There is fierce competition amongst investors, and it’s interesting to see multiple investors chasing a good developer or a project,” said a fund manager, who didn’t wish to be named. Among recently concluded deals, Bangalore-based Total Environment Building Systems Pvt. Ltd raised `255 crore by selling non-convertible debentures to Indostar Capital Finance Pvt. Ltd at an interest rate of 17%. Total also raised `200 crore from Peninsula Brookfield Investment Managers Pvt. Ltd at around 19%. “Since debt returns have reduced owing to excess and easily available capital, we may see a return of equity transactions by mid-2015,” said S. Sriniwasan, chief executive of Kotak Realty Fund. Source : CREDAI
Posted on: Tue, 16 Dec 2014 18:13:05 +0000
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