Builders to tie up $2 billion capital ensuring supply of commercial realty: ICRA

NEW DELHI: The commercial real estate sector has seen interest from several large international funds and PE players as the market has gradually recovered since FY2015, said ratings agency ICRA.

Several of these investors have created platforms with builders and are likely to commit over $2 billion of capital. Many of these institutional investors are now looking closely at residential real estate as well, though it is still selective. “The tie-up with international investors would help real estate developers build a healthy launch pipeline. The table below gives the details on some of the notable transactions,” ICRA said.

Such investment platform help developer’s access capital that can be used across projects. Usually, such investment is routed through a special purpose vehicle (SPV) created for the specific project where costs and profits are shared by the partners in a pre-determined manner as per their respective economic interests.

“The investor is associated with the project since the start, and is provided an exit through the ultimate monetisation of the project. The interim profits generated from the projects are, sometimes, invested in acquiring interest in new projects thus lowering the incremental equity contribution from the partners as well as opening up a more tax efficient way of channelising profits,” ICRA said.

Shubham Jain, vice president, ICRA Ratings said that the stress in the industry has made available ample investment opportunities in the sector at attractive rates.

“With over US$ 2 billion of capital commitment expected under various platforms, the leading developers would be able to acquire new projects thus ensuring a steady launch pipeline over the medium term. Moreover, the equity nature of such partnerships would reduce the burden of providing any committed exit to partners,” he said.

Till recently, real estate development worked through outright purchase of land parcels, necessitating a large upfront investment by builders. Moreover, the delays in project launches resulted in a lock-up of the developers’ capital over a longer time period, thus eroding the returns on capital employed. The past decade, therefore, saw other asset-light models of development, like joint development agreements (JDAs), joint ventures (JVs) and more recently, development management agreements (DMAs) gaining prominence.

This shift from the land-banking model to risk-reduced project development has also attracted many international investors. Among the first to do so was Godrej Properties Limited (GPL), which launched a $200 million investment platform in partnership with Dutch pension fund asset manager APG Asset Management NV in 2012, following it with an additional $275 million platform with the same investor in March 2016.

While the private equity investment inflow in the industry has been healthy, the domestic real estate developers have been grappling with challenges such as subdued sales as well as cash flows.

“Given the limited supply coupled with the delays in execution across projects, there has been a shift in consumer preference towards projects from large and reputed players. This, however, has helped support the sales for large developers, though the overall demand continues to remain muted,” ICRA said.

Jain of ICRA said that by partnering with well-established and experienced developers, having a demonstrated track record of execution as well as delivery of projects, private equity investors are able to participate in the domestic real estate sector while reducing the exposure to execution as well as counterparty risk.

Most such partnerships have been limited towards leading developers. Mid-rung developers have got investments in the form of debt or structured instruments which allow for profit-sharing with pre-defined minimum returns. The significant funding requirement in the industry has created an opportunity for non-banking financial companies (NBFCs), which operate in a less rigid regulatory environment coupled with their larger risk appetites.

The recent policy changes are also expected to help create a more favourable operating environment for foreign investors. For instance, the recently passed Real Estate (Regulation and Development) Act, 2016 seeks to bring in structure and much-needed transparency in the industry and thus is expected to be a positive for the sector in the long run.

The Government of India (GoI) has also amended the foreign direct investment (FDI) norms for the sector to provide an impetus to foreign investment. The reforms pertaining to the sector include removal of the minimum FDI eligibility criteria in terms of size from (20,000 square meter earlier) and capital (US$5 million earlier), permission of FDI investment in completed projects, and easing the process of exit for investors by allowing exit and repatriation of the investment before the completion of the project.

Credits ET Realty

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