Private equity and offshore funds flock as Banks cut loan exposure to real estate developers

NEW DELHI: As banks cut their loan exposure to real estate developers, some private equity and offshore funds as well as domestic financial services players are latching on to the opportunity by providing debt to these companies.

A number of them like Red Fort Capital , Credit Suisse and Goldman Sachs are setting up non-banking financial companies (NBFCs) to either lend to property firms or invest in debt and quasi debt securities issued by these companies. Local groups like Future and Piramal are also participating in such secured lending. Foreign funds have severe restrictions in taking direct debt exposure to real estate companies.

Earlier, they used to subscribe to instruments like optionally convertible debentures, preference shares and securities attached with put options to invest in Indian real estate companies. Such investments, which were essentially debt, would masquerade as equity investments under the automatic foreign direct investment route.

With the government shutting these investment windows, offshore investors have found out that it makes more sense to set up NBFCs to fund real estate companies. "This would mean better control over the asset for the investor. In today's environment, security is of paramount importance to investors," says Sanjay Darolia, vice-president, finance, at TCG Real Estate , which has an NBFC in India. In the past some of the foreign investors have burnt their fingers when they stepped in to attach securities following defaults.

The enforceability of securities ran into legal hurdles and borrowers pointed out FEMA violations to wriggle out of their commitments. Such problems are unlikely to arise when a local NBFC buys debentures that promise a high return. "A lot of private equity investments in the past had debt like features and RBI had raised questions about it. Now a number of funds are finding a more legal way of providing debt," says Sameer Nayar, managing director and head of real estate finance, Asia Pacific at credit Suisse Securities .

Credit Suisse has a local NBFC in India. Since property stocks have been volatile and suffer the most during a downturn, debt exposure by NBFC arms help foreign groups to diversify their bets on the Indian property sector. "Foreign funds are securing their equity investments in Indian real estate by taking parallel debt exposures through NBFCs along with their offshore equity funds," says Anckur Srivasttava, chairman of GenReal Property Advisers.

Apart from construction finance, many developers require money to repay their existing bank debt. As customer advances have slowed down, the developer is looking at ways to raise cash without reducing the price of his product. In the recent past, some developers have raised capital from moneylenders at very high costs, sometimes even up to 36% a year, in order to hold on to prices.

Foreign private equity funds that are looking to invest through their NBFCs can also raise money from local banks. They can leverage the money they have put in the NBFC up to six times. "This allows them to have a bigger balance sheet on the NBFC side," says an industry expert.

In India, foreign funds that invest in real estate are bound by FDI norms, which put restrictions on how much, and what they can invest in. "A key reason why NBFCs are being used by these funds is that NBFCs do not have to comply with FDI guidelines and there is a lot less end-use restrictions on them," says Srivasttava.

Private banks often use their NBFC subsidiaries to lend to property firms as the parent bank has internal exposure limits on such sector . Besides, NBFCs often serve as an intermediary between an FII (which are restricted from investing in unlisted debt securities) and a property company.

In such transactions the realty company places debt with an NBFC, then goes for stock exchange listing of the securities. Once listed, the securities change hands, with the NBFC offloading the papers to the offshore fund.

Source:- Economics Times

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