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For investment professionals, demonetisation has thrown open the doors in terms of real estate opportunities. Demonetisation has reduced speculation around real estate assets for the time being and moving ahead given RERA regulation, this impact is here to stay. Real estate assets – not being speculative in nature and reflecting real fundamentals – are not only beneficial to the economy overall, but also create three opportunities for investors:

1) Lending Opportunity to Small to Medium-Sized Developers: While large-scale projects and developers have seen significant interest from private equity and real money investors, small to medium-sized developers have seen their traditional sources of funding dry up with demonetisation. The fact that most of these developers were struggling with high debt levels prior to demonetisation has only exacerbated the problem.

Additionally, RERA has ended the traditional practice of using home buyer’s advance payments to fund projects to a large extent. Demonetisation has reduced the access to cash. These changes are positive in the long run and have created a need to provide funding to the medium and small-sized developers. The investment opportunity specifically is in bridge loans to complete projects that are stuck at 50-80% of completion. The obvious question is that given the influx of funds into real estate in the last 3 years, why do these opportunities exist? The reasons are:

a. The relatively smaller size of the projects creates deal sizes not worth the time for some of the larger funds. Mind you, the due diligence required is the same as the larger ticket size deals.

b. Asymmetric information is another issue. However, working with local advisors to put together a portfolio of such assets to create dispersion around location of project, type of project and term structures of loans should create value.

c. Most of the focus in the last few years has been on high quality office space. However, a lot of residential projects are stuck as well. The ability to acquire these residential projects at a discount or to use structured finance transaction to get equity kickers can create significant value.

2) Sale and Leaseback Transactions: While a lot of lenders have seen a rise in NPAs in their loan books as high debt levels take a toll, foreign investors so far have been relatively reluctant to invest in distressed Indian opportunities. Demonetisation has started the process of making the real estate sector far more professional and institutionalized. Lenders should use the real estate sector with a revitalized image to shore up their balance sheets. There is tremendous demand for attractive brownfield real estate from yield hungry foreign investors.

Perhaps lenders such as banks can start monetising their real estate assets through a sale and lease back agreement with foreign investors and take advantage of the new image of a far “cleaner” real estate sector. A large bank owns significant property in prime areas of, say, Delhi, Mumbai, Kolkata and Bengaluru. The bank can work with an investor such as a pension fund or an insurance company to sell their office assets to the investor and lease it back for operations. This solves a twofold problem. The bank gets capital infusion that it so sorely requires and the investor gets access to attractive assets with a better credit borrower rather than investing in the distressed loans. The economy overall benefits tremendously since the capital infusion adds value. Demonetisation has created this opportunity with an enhanced image for the real estate sector.

3) Affordable Housing: Demonetisation has reduced the speculative nature of house buying to some extent. Hence demonetisation has made houses more affordable. This implies this is the right time to push ahead with the affordable housing scheme in full throttle. While the interest rate subsidies by the government are a step in the right direction, we feel additional regulations are required. Essentially demonetisation has provided us with a real estate sector that is ripe for new regulations such as:

a. Affordable Housing PPP – The Road project PPP model in India is a good template to learn from. The government should standardize documentation and take care of land acquisition. The government should acquire land that is relevant for affordable housing directly. This also assists distressed developers to monetize assets from their land banks.

2. Affordable Housing Authority – The government should create a central authority modelled on the lines of NHAI to take care of land acquisition, title deed issues, environmental clearances and viability analysis

3. Bidding Auction – The private sector should bid for projects all the way from grants on one end of the spectrum to revenue premium at the other, depending on the financial feasibility of the projects

Demonetisation has lent credibility to real estate. This is an opportunity to leverage the new-found credibility to provide a fillip to a core and much troubled sector of the economy to create not just economic value through the efficient use of capital, but also tremendous social capital as a nation.

(The author is CEO, Development Tracks)


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