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March 19, 2013

How Real Estate financing has adapted to the New Normal

From a recent Business Today Cover Story:
There was a rush of foreign direct investment into Indian real estate when the sector was first opened, but that is now drying up. Private equity (PE) players, foreign and domestic, have greatly reduced their exposure - their investments in real estate fell by 36 per cent in 2012 over 2011, as compared to a 19 per cent reduction in such funding in India as a whole. And those still backing realty projects, such as Motilal Oswal PE or IIFL Private Wealth, have started offering loans instead of acquiring equity charging interest of more than 20 per cent and seeking collateral often twice the size of the loan.
...Even a veteran realtor such as the Mumbai-based Oberoi Realty, while venturing into the National Capital Region, has been looking for a local developer or landowner, so it only has to invest in the building of the project. Or take Nitesh Estate, a newcomer in the field, but one which has already done a successful IPO - it operates without any land assets. "This model allows the realtor more flexibility as the developer is not paying interest on loans taken to buy the land," says Pranay Vakil, Chairman, Praron Consultancy, and the former founder-chairman of property consultant Knight Frank India. "He can go about a project building by building, selling one fully before starting on the next. It also gives him more holding power in a bad economy." He says that at least half the projects under construction now follow this model.

Banks may still be reluctant to lend to realtors, but new ways of raising funds are being found. Hirco Plc, for instance, is using overseas funds in Indian projects in an ingenious manner. The company, launched by Priya Hiranandani-Vandrevala, is listed on the Alternative Investments Market (AIM) of the London Stock Exchange. Its projects in India, however, are built and marketed by a different company called Hirco Developments, led by Firdose Vandrevala, uncle of Priya's husband Cyrus. "Our model is to set up a special purpose vehicle (SPV), with Hirco Plc investing in it and getting preference shares," says Vandrevala, formerly with the Tatas and also an ex-chairman of Motorola India. "The Hiranandani family brings in the land and is allocated equity shares in return. Hirco Developments builds the products and markets them for a fee." It is currently executing one project at Panvel on Mumbai's outskirts and another in Chennai.
...While selling some of its Mumbai flats, Lodha Developers tried another tactic. It offered them in a price band instead of at a fixed price, in much the way an initial public offering (IPO) does, and decided the final price only after receiving buyer responses. Much like a successful IPO, it drew twice as many applicants as the flats it had to sell. "It was a nice way of grabbing some of the demand," says Vakil of Praron. Flat allotees too were later chosen through an automated software programme, the way IPOs do.
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