Indiabulls, Edelweiss look to launch AIFs to advance realty loans

Financial services groups, such as Indiabulls and Edelweiss, are looking to launch alternative investment funds (AIFs) to advance loans to property developers.
 
This comes after they sold developer loans to investors to de-risk their books and generate funds after the liquidity crunch in the non-banking financial sector (NBFC) following IL&FS defaults.
 
AIFs are pooled investment funds that put in money in private equity, real estate, etc. They are a better way to manage wholesale funding for real estate, given that it is difficult to keep tabs on ALM (asset liability management) and compliances related to classifying loans in the case of NBFC funding, said Ramashrya Yadav, founder and chief executive officer, Integrow Asset Management.
 
“The uncertainties of real estate cash flows and the timeline of completion can be structured better through an AIF,” Yadav said.
 
NBFCs and housing finance companies, which were major sources of funds for property developers, stopped incremental lending to them due to asset liability mismatches arising out of a liquidity crunch.
 
Indiabulls Asset Management is in talks with large global investors for a partnership that will focus on giving construction finance to developers by which its parent will give 10-15 per cent capital.

 
It might do a new scheme but under the existing AIF, depending upon the structure, said Ambar Maheshwari, chief executive officer (private equity), Indiabulls Asset Management, in a recent interview. The group’s housing finance arm, Indiabulls Housing Finance, has been refinancing its developer loans to generate liquidity.
 
Indiabulls was negotiating a deal with Oaktree to raise $200 million (Rs 1,500 crore). It had also raised Rs 2,200 crore from Oaktree in June last year by refinancing part of its developer loans to Oaktree through non-convertible debentures.
 
Edelweiss is also moving in the same direction after it sold developer loans to investors.
 
Edelweiss Asset Management is looking to launch a real estate fund early next year. The fund will give credit to developers and do last-mile financing deals in real estate, said Hemant Daga, chief executive officer, Edelweiss Asset Management.
 
“Most of the opportunities have moved to AIFs, which can give long-term capital. Even if NBFCs get back to real estate, there is a bigger opportunities for AIFs,” Daga said.
 
At the end of 2019, it raised a $250-million last-mile financing fund to invest in real estate. The money is fully deployed. Edelweiss said it would transfer wholesale loans worth Rs 2,000 crore to the AIF for real estate completion financing as it planned to reduce corporate credit portfolio by 50-60 per cent over the next two years.
 
Last year, ECL Finance, the NBFC arm of Edelweiss, sold loans worth Rs 4,000 crore to investors. The group said it was selling loans worth Rs 3,000 crore by March 2021 to become capital-light.
 
Piramal Group has floated a structured credit fund last year. Piramal Capital & Housing Finance sold loans of Rs 2,000 crore of Lodha Group to Goldman Sachs in 2019.
 
The company earlier said it would reduce exposure to property developers and increase the share of the retail book.
 
Ashish Khandelia, founder at Certus Capital, said despite improving physical markets, domestic institutions remained fearful and unlikely to come back in a hurry.
 
“Some players are setting up alternative funds to bridge the capital gap, which is enormous. But such capital will remain a trickle compared to the institutional pullback, keeping the sector capital starved and cost of capital elevated.”
 
Khandelia said prior to the credit crisis, the net annual wholesale real estate lending growth of NBFCs/housing finance companies was over $6 billion. However, since then, growth has been negative, leading to a net financing reduction to the sector of more than $7 billion per annum.
 
“Since NBFCs have lost sheen, there is a big opportunity for AIFs,” said Shobhit Agarwal of Anarock Capital.