From ET Realty
NEW DELHI: HDFC Capital Advisors, a new arm of India’s largest mortgage lender HDFC, is raising a Rs 5,000-crore fund that will make long-term equity investments in middle-income housing projects across the country.
In a first, the fund will have a 12-year tenure, suggesting a possible return of confidence in Indian real estate among overseas investors. In the past six to seven years, investors had shifted to debt because of uncertainty regarding the sector’s prospects. The entity has already raised Rs 2,700 crore, said HDFC chairman Deepak Parekh.
Of this, HDFC has invested Rs 300 crore, while the rest has come from two large global investors. HDFC Capital Advisors will be headed by Vipul Roongta, who is currently leading investments at HDFC Portfolio Management Services. It’s registered with the Securities and Exchange Board of India as an alternative investment fund. Parekh said there is vast potential and latent demand for mid-income housing, which covers apartments in the Rs 25-75 lakh price range, depending on the city.
Unlike most funds that are engaged in structured lending to stressed real estate developers across the country, the new entity intends to invest in pure equity. “Most PE (private equity) funds are doing structured lending at 18-22% and most funds have a six-eight-year tenure. We are keen to do a long-term fund and pure equity,” said Parekh.
He said that equity is the need of the hour in Indian real estate. With sales slowing, it has become difficult for builders to service debt.
“Developers would ideally prefer equity where the risk gets shared with the fund,” Parekh said. Most developers that borrowed money at 20%-plus are in trouble, he said.
“You cannot survive with a 22% interest rate,” Parekh said. “Banks can’t fund land so builders have to depend on NBFCs (non-banking finance companies) and PEs to do structured finance to buy expensive land. In urban areas, land constitutes 50-70% of the cost of the project.”
Over the past few years, projects have got stuck due to problems with approvals and sales absorption. In such a scenario, a number of funds have got sub-optimal returns simply because the tenure is shorter than the timeline of the real estate project. HDFC Capital Advisors will enter as equity partners with developers and monitor projects besides nominating board members in special purpose vehicles and ensuring governance, Parekh said.
The fund will take equity in large housing and township projects and could also look at brown-field smart cities that the government is backing. It will buy fresh land with developers and enter into partnerships with them. “We have been in the business for 38 years and we know developers who we can work with, who we can trust totally and who have the right governance standards we are looking for,” he said.
Home sales across the country have slumped in the past two years because of economic uncertainty and adverse sentiment, leading to inventory piling up in the big cities. According to property research firm Liases Foras, at the end of September 2015, unsold inventory in the top eight cities stood at 1,075.7 million sq ft.
This has pushed developers into a tight spot with cash flows become ever more unpredictable and putting a question mark over their debt-servicing capability. Builders have resorted to offering innovative payment plans and discounts but that has failed to stimulate the market.