The conventional thinking to real estate capital, which was dependent on landowner joint venture, pre-sales and customer advances, now has gone. Developers are reclining to other funding routes by entering into HNIs and corporate tie-ups.There is an excessive need for capital, which has been forced on the back of deceleration in sales compared to the projection/ assumptions. Steady regulatory changes requiring plan modifications, complete approval and re-approval costs, litigation, FSI charges and customers shying away from settling stage-based payments in favor of subvention or other financial schemes, all this has put unexpected pressure on projects cash flows. This has given a sense of gloom and caution while taking new projects.
The order for capital yearly exceeds over, 50,000 crore outside of the banking sector only within housing projects in major locations. Total exposures of banks have shrunk to below 10 lakh crore, which stands over 11 lakh crore.
Private institutional capital source fail to put in more than 8000-10,000 crore annually. Therefore 80 per cent of the capital requirements are still unfulfilled.
Now the institutions are being cautious; setting up terms that protect capital under stress scenarios, being selective about investment partner, and conducting due diligence and partner discovery exercises. Developers who have prepared themselves for the long haul to recovery sacrifice short-terms profits for long-term gains and work in an orderly and disciplined manner, and then they are able to find capital support easily.
Big corporate developers with strong credit and development history are easily able to enter public debt markets, deposits, foreign institutional investors and other sources of global capital. Due to given margin and uncertainty in cash-flow timing, developers are drawing caution while resorting to expensive private capital through funds, and other private sources due to the cost and terms.
Defluxion has been seen among developer towards equity and quasi capital. Even it meant sharing the upside and profits with capital partners. Developers are becoming aware of the requirements under RERA and have also started business practices to adjust themselves according to the regulations. It is all happening even before the implementation of RERA. Alternative funds are also seeing it easier to put in place a financial discipline because it also matches with RERA requirement. Developer are now being very cautious about; development, regulatory and local norms. Which is consequently make it more simple in creating alignment with their investments, in conducting reasonable steps to avoid committing a tort. As it is helping developers to put in place businesses that are RERA ready, developers are appreciating stringent cash flow. They are also welcoming management norms required by funds.
A fundamental shift in approach in the direction of capital, emerging discipline in fulfilment among developers and high risk adjusted returns resorted by strong assets are creating a huge crowd among private capital investors. Revenues have been strong and steady for RE fund managers over the span of last two years on the back of structured finance, and this also includes senior and subordinated debt.
Exit of funds and investments post 2010 have allowed for successive fund raise. The possessions under management have also grown significantly over the last three years. General PE investors; Brook field, Apollo and KKR are ready to enter into this movement with higher corpus commitments.
Progressively, projects are being re-designed for 1-2 BHK. Delivery times have been accelerated to serve to this growing demand. Prices and amenities for the projects are being rationalized. Many budgetary and monetary have also given the acceleration to this activity.
Investors and funds are mobilizing for such projects, which cater on a large level to the MIG and Lower HIG segment, since these products have faster sales momentum.
Catering to the small ticket (sub-15 lakh) still proving to be a challenge for developers. Funds are still being cautious about the impact of RERA Act. Solitary selected bipartite and multi-lateral institutions or global investors have shown downgrade to back strong players who serve for this LIG segment.