The various forms of funding available to Developers
Initial Public Offer (IPO): Over the last one year, for large and reputed developers especially, IPOs had emerged as an attractive source of funding. Every developer who could pass muster at the regulatory level was trying to do an IPO since their offerings were getting a good response. But the picture changed with the Puravankara Projects IPO where the promoter had to both lower the offer price and extend the offer period.In future, pulling off a successful IPO will become more difficult. With sentiments on the stock market not so bullish anymore, only developers with a good reputation and a track record will succeed. Their offer price too will have to be more realistic.
Private Equity (PE): This was already a popular option, and now, with IPOs becoming difficult, it will become even more attractive in the days to come. It is believed that more PE investments both at the SPV (special purpose vehicle) and the entity level are alraedy making its way into the real estate market. It is learnt from reliable sources that anywhere between $10-20 billion private equity money are or would be in the pipeline for investment in the Indian real estate sector.It is a known fact that earlier, Indian developers were reluctant to part with equity. But now that raising funds from debt sources and through IPOs has become difficult, the mindset is changing.
Bank Loans: RBI regulations do not allow bank loans to be used for land acquisition, though it is available for construction. But the interest rate is high at 13-15 per cent. Besides the higher cost, availability has become an issue because of RBI imposing a cap on individual banks’ exposure to the real estate sector.
External Commercial Borrowing (ECB): was earlier available for townships of 100 acres or more. At an interest rate of 6-7 per cent, this was an attractive source till the RBI banned it completely.
Mezzanine Capital: This is a form of bridge loan offered for a limited period. Foreign mezzanine has been banned completely by RBI. Domestic mezzanine is available from non banking finance companies (NBFCs). But one, there are very few NBFCs, and two, the interest cost demanded by them is high at 16-20 per cent.
Alternative Investment Market (AIM): Listing on the Alternative Investment Market (AIM) in London had emerged as a popular option for real estate developers about a year ago. This option has dried up in recent times because most of the funds listed there are trading at a discount. Investors are now wanting want to see the performance of Indian companies listed earlier on AIM before investing further.
Real Estate Investment Trusts (REITs) : Reits still on the cards, is expected to be operational in India in the next few months.Reits would allow developers to sell off their ready assets, and in turn would free up capital and allow developers to start new projects.
Contributed by Sangeet H Kumar
CEO, New Equations Consulting