Developers Chase Costlier Private Equity Funds As Banks, NBFCs Stay Away

Why Banks Retreated

While non-bank funding dried up after two NBFCs went bust, the reason for reluctance among banks and housing financiers is different.

In the past, when a developer launched a project, the real estate company put in 25%, borrowed 60% from a bank and relied on sale of under-construction units for last-mile funding, said an industry expert.

Because of stricter regulations and delayed projects, they didn’t get last-mile funding, said the person who didn’t want to be identified out of compliance concerns. Builders approached lenders for refinancing but the Reserve Bank of India requires such loans to be classified as bad debt and downgraded, he said. Changes are required in regulations to provide this last-mile capital to complete the projects, he said.

BloombergQuint awaits responses on queries emailed to Housing Development Finance Corporation Ltd., Indiabulls Housing Finance Ltd. and State Bank of India.

“There are various guidelines that restrict banks from funding real estate projects because of the risks involved,” Todi said. “They also prefer a more affordable segment compared to the mid-luxury that we are catering to.”

Costlier Funding

Alternate asset managers charge 20-25% to provide this capital and developers will have to increase prices, the person cited earlier said.

Todi agreed that such funding comes at a cost. Yet, it’s worth it, he said. “A real estate project requires cash flows upfront, and later money keeps coming. Given these factors, PE funding is not that cumbersome.”

Shriram Properties Ltd., another mid-sized developer, called alternate funding an “easy alternative. The company gets favourable and competitive terms because of its track record, according to Murali Malayappan, chairman and managing director at Shriram Properties. Private equity investors, real estate credit funds appreciate “realities on the ground”, he said, explaining why the developer prefers them over banks.

An Opportunity

Firms like Motilal Oswal Real Estate Investment Advisors Pvt. see the crunch as a short-term opportunity. It launched its first construction finance fund and closed a second round of about Rs 50 crore, according to Sharad Mittal, chief executive officer at the company.

“All our previous funds focused on the land acquisition stage with not much space for private equity funds,” he said. “Construction finance opportunity is between Rs 60,000-85,000 crore a year. Between 2013 and 2018, a large part of that was getting funded by NBFCs. Eventually, a large part will again be funded by banks as the market settles down,” he said. But in the next two to four years, he said, there is a chance for “a fund like us and some of the global funds”.

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