OUT OF BOX REAL ESTATE FINANCING STRATEGIES
Real estate's market shifts have been distinctive and over the past five to six years, it has witnessed considerable growth across the country in all asset class- es especially, during the past two years. However, it was also recorded that last year's institutional capital influx in India, despite reaching an impressive 4.5 billion UDS, fell short of the 2019 peak of 6.5 billion USD. Though, optimism prevails as pent- up equity and increased allocations from investors is anticipated. As Anuj Kapoor, Partner & Founder, Upwisery said, “We an- ticipate a significant influx of capital into India in the coming years, despite last year's decline which stemmed from global economic in- stability causing large investors to exercise caution. The proportion of institutional investment from global sources has decreased from 80% to 65% in one year, while domestic Indian capital has surged, including heightened interest from HNIs and family offices.” Sharing his experiences and strategies in securing finance for his major projects, Ajitesh Korupolu, Founder and CEO, ASBL, articulated, “We enhanced our access to insti- tutional capital by working towards a lean corporate framework and increasing investment appeal by ensuring consistent investor returns. Institutional backers provide resilience and expertise during economic cycles, stabilizing our foothold amidst market fluctuations.” Discussing the debt strategies being considered to ensure mutual benefits for developers under the current market conditions, Anand Lakhotia, Managing Director & Co- Head, Motilal Oswal , Real Estate, stated, “Our financial structures ac- count for the cyclical nature of the industry, offering developers a grace period of 9-12 months before re- payment begins to avoid corporate strain. We structure the transactions to reflect equity-centric flexibility, closely aligned with project cash flow and market conditions. Despite recent market challenges, we maintain this bespoke approach to ensure projects are equipped to meet their financial obligations au- tonomously.” Highlighting the distinction in the approval process of the fund relative to other financing methods and their respective project implementation procedures, Abdul Kader Suriya, Chief Investment Officer, SBICAP Ventures Limited, said “Launched in late 2019 amid visible distress in the Indian real estate sector with over 500,000 units affected, the government-sponsored SWA- MIH Fund, aimed to rescue stalled projects with a nominal return of 12% IRR. Unlike conventional funds, SWAMIH Fund operates across India, supporting a range of developers and project sizes with a unique strategy that balances social impact with commercial viability. Our rigor- ous due diligence, finance strategies, and hands-on asset management ensure resilience and success across our expansive portfolio, setting new industry standards.” The latest development is the sector has been of large developers across India beginning to establish their own Alternative Investment Funds for financing, notably part- nering with financial institutions to create a fund. Elucidating whether this strategy is increasingly being embraced by developers, Parvesh Sharma, Country Head India, Tish- man Speyer Private Limited said, “After examining global trends, it's evident that domestic funding is the most effective method for financ- ing projects, mitigating currency risks and challenges associated with foreign funds. This approach has proven successful in places like China, and in India, partnering with Axis AMC for funding allowed us to raise necessary capital. Despite the difficulty in explaining this strategy to retail investors, keeping the funds regulated by the SEBI ensures a se- cure and efficient funding process." Recently, the RBI has imposed limitations, permitting only AIFs to engage in certain land stage fund- ing activities. Commenting on the financial mechanisms NBFCs employ to assist developer partners with liquidity events and subsequent project financing, Jitendra Singh, Head – Construction Finance, Hero Fincorp, said, “Construction financing limitations have led to the exploration of inventory funding to support growth; despite RBI constraints on direct lending, there is a potential for banks to fund land acquisitions. We remain cautious, committing only when sales and construction thresholds are met, aligned with RERA's debt avoidance safeguards.” REAL ESTATE INVESTMENT TRENDS In recent years, Hyderabad has experienced a remarkable economic phase characterized by widespread adoption of pre-sale and sale debt strategies by developers. Ajitesh Korupolu expressed his views, “In declining markets, sustainability of pre-sale models is highly questionable; however, they show potential for success in bullish markets with an estimated 70-75% chance. The complexity increases when funds are sourced through numerous investors versus a single bank, as this introduces a multitude of exit strategies, often leading to project disruption and slowed construction cycles. Moreover, lack of due diligence seen in one-time payment schemes compared to bank financing further compounds the risks inherent in these models.” What’s more, today, several global investors have engaged in platform deals with top developers for projects such as affordable housing, a practice not widely mirrored by domestic institutions. On the viability of platform agreements with local developers and the potential attractiveness of various structures, Abdul Kader Suriya, commented, “Platform transaction values held steady at $4 billion last year, mirror prior year trends. Institutional inves- tors are encouraged to partner with well-governed developers focused on the stable yields of non-residen- tial investments.” Globally, market volatility and cap rate shifts, particularly in the US and India, coupled with an over- supply in cities like Hyderabad, have stifled core asset transactions due to significant valuation disparities. However, Parvesh Sharma was of the view that financial closures for commercial projects differ markedly from those in residential projects, the latter having incoming receivables during execution. “Developers must consider exit strategies to secure funding for built-to-lease properties, as early-stage development bears significant risk. Entering forward purchase agreements provides clear exit strategies and locks in current capitalization rates, mitigating risk but potentially foregoing future gains if rates decline.” Predicting the possibility of partnerships between global and Indian developers, in the next few years, Parvesh Sharma added, “Japanese investors are showing a strong and collective in- terest in entering the Indian market, with significant recent acquisitions such as Sumit Oma's purchase of land in BKC and Lower Parel.” Indian cities are experiencing significant high-rise development, yet many construction finance lenders are reluctant to fund 45- 50 story buildings. Addressing the institutional lending challenges and alternative financing options for de- velopers, Jitendra Singh said, “For instance, in the Hyderabad market, the emergence of tall buildings has diminished previous apprehensions and increased property value. As a lender, I would not consider height a hindrance in funding high-rise constructions.” Elaborating on the current trends in seed-stage funding, con- sidering the past lack of suitability in certain markets which now appears to be shifting significantly, Anand Lakhotia said, “Recent years have seen remarkable sales for well-established developers, with current inventories indicating a sell-out within six months if no new developments arise. Consequently, the market shows a high demand for land acquisition capital, to which we selectively respond by partnering with proven developers.” Anticipating the future financing landscape for developers, Anuj Kapoor said, “In the future, technological advancements are expected to revolutionize the financial sector by enhancing transparency and streamlining operations, par- ticularly in fund management and fundraising activities. Shifting from model-based to transaction-based monitoring and leveraging develop- ers' reputations for securing funds more effectively represents the anticipated transformation in this domain.” I believe there is far more capital which will come to India in the next few years. The dip what we have seen last year is largely because the large institutional investors globally are cautious in terms of looking at investments in the country due to a lot of challenges at the global level- Anuj Kapoor Our objective has been very clear, despite being a debt lender in most of our projects, the structuring is more equity, where it is linked to project cash flows and what is the expectation in the market, how the sales will be, how and when the approvals will be in place etc- Anand Lakhotia We realized that sometimes, the project commercials or viability gets communicated, but not the promoter’s intent and that is where we pondered on how do we communicate the intent part, which cannot be done through an Excel model. We have paid back money before due time which showed our intent and helped us get more funding that greatly enabled us in scaling up- Ajitesh Korupolu There is right now 700 million square feet plus of a grade A office space available in India, of which, much space is going towards REIT, while Blackstones, Brookfields and GIC are buying those assets. But investors don’t take the risk of coming in at an early stage, or the land stage, then developing, leasing and then exiting it- Parvesh Sharma Post-election, it is anticipated that the investment landscape will invigorate due to increased clarity, despite the current funding scarcity and the cautious stance of investors, prior to knowing the election outcomes.-Jitendra Singh Real estate cycles usually last up to 8 years, and a significant rise in sale prices has occurred since 2020. Current market trends show low inventory paired with high demand, suggesting profitable investment opportunities, provided that developers are supported wisely-Abdul Kader Suriya
Tags : REAL ESTATE INVESTORS TRADITIONAL FINANCING BOX NEW MODELS INVESTMENTS PORTFOLIO INCREASE RETURNS Anuj Kapoor Upwisery