NBFCs' importance goes up in sluggish property market

At a time of falling sales and more credit risk, they are elbowing out PE firms with cost, turnaround and flexibility rationales.

Non-banking finance companies (NBFCs) will give private equity (PE) firms a run for their money in the realty sector this year, as developers fight falling home sales and tight bank credit.

Many PE firms did structured or mezzanine debt deals in the past two-three years. The rates were 25-26 per cent, and they’d down-sell it to NBFCs at 17-18 per cent and exit. Now, NBFCs are directly doing straight debt deals with developers at 18-22 per cent, say top property consultants.

According to consultancy Jones Lang LaSalle, there are at least 20 NBFCs active in real estate lending, compared to six-odd just three years before. Along with the established players such as HDFC, DHFL, LIC Housing Finance and Kotak, there are a number of new ones such as Indostar Capital Finance set up by Ashmore Group Plc, Everstone Capital, and the PE arm of Goldman Sachs; also Piramal Capital, the NBFC set-up by the Ajay Piramal Group; the NBFC floated by the Xander group, and Edelweiss Capital. All are active in real estate lending.

“Increasingly, NBFCs are realising they can do debt deals directly and take exposure to realty projects than buying debt papers from PE firms. They think they can do all the due diligence themselves and take charge on the projects,” says Raja Kaushal, managing director, real estate and infrastructure advisory, BNP Paribas. Pointing to the Rs 810-crore deal between PE giant Blackstone and realty majors DLF and Hubtown for the Pune Special Economic Zone, he says while the big PE firms would chase larger deals, “NBFCs have come into play due to a quicker turnaround time, flexibility in end-use and size of funds.”

On the other side, consultants and fund managers expect a significant shortage of funds in the PE arena. Around $3 billion (Rs 15,900 crore at today’s exchange rate) of funds raised in 2006 and 2007 are set to exit in 2012, as their funding cycle is coming to an end. Only a handful such as Indiareit, Kotak, HDFC and Red Fort are raising new funds now, they point out.

PE investments in real estate were $0.85 bn (Rs 4,505 crore at the current exchange rate) in 2011, according to JLL. It was $6.7 bn in 2007 and $3.3 bn in 2008. Against this, NBFCs have deals worth Rs 3,000 crore in the current year and this is set to rise next year, says Amit Goenka, national director, capital transactions, at UK-based global property consultant Knight Frank.

Other reasons
“The PE business is on a decline and it is only a matter of time before NBFCs will take over the business of PE firms in real estate,” says Goenka. “Only a handful of PE players have made money in real estate private equity.”

Adds Kaushal of BNP Paribas: “Though the debt market was created by PE firms, regulators will close the lid, sooner or later, and say PE firms cannot do fixed return deals. Then, the game is only for NBFCs.”

Besides, NBFCs are playing a key role in supporting promoters of Indian realty companies to provide exits to their PE partners, says JLL in a recent report on PE exits in Indian real estate.

“Though lending rates have gone up...the flexibility in usage of funds and with over 20 active NBFCs, they (NBFCs) are the principal means of finance for buybacks,” said the report.

Lending rates of NBFCs have gone up from 15-16 per cent in 2010 to 18-22 per cent per annum now due to the rise in interest rates, while the return expectations of PE firms are way in excess of 20 per cent, consultants said.

Ramesh Jogani, managing director and chief executive, Indiareit Fund Advisors, part of the Ajay Piramal-promoted Piramal Healthcare, agreed that NBFCs were playing a greater role in real estate financing.

“NBFCs are lending to repay bank loans, buying land and for construction finance. I think NBFCs are going to take over the business of private equity in real estate financing,” he said.

Adding: “You must also understand that earlier developers were seeking money for land aggregation, building hotels and large malls and so on. Now, money is mostly required for construction and very few land buys, which are met by NBFCs.”

Developers say they are raising funds from NBFCs to tide over the short-term crisis due to declining home sales and quarterly repayment targets.

“I think only developers unable to raise funds or over-leveraged are raising funds from NBFCs. Though costs are high, they are opting for these funds as they have to meet quarterly bank payments or have some payments to make towards land,” said Deepak Goradia, managing director, Dosti group, one of the largest developers in Mumbai.

Executives from NBFCs agree. “Earlier, developers used to fund projects with customer advances. Since sales are down, they are funding these with lenders,” said an executive from Indostar, who did not want to be named. 

ADVANTAGE NBFC

Twenty active NBFCs in market 
 

More exits, lesser fund raising by PEs in 2012 
 

Developers opt NBFCs for quicker turnaround, flexibility 
 

NBFCs played key role in promoter buybacks of PEs in four years 
 

See better prospectus due to declining home sales, tighter bank credit