Real estate fund managers float schemes for construction finance

Property fund management arms of Motilal Oswal, Indiabulls, and others are launching funds/schemes to lend construction finance to real estate developers.

With non-banking financial companies (NBFCs) almost stopping new lending and banks becoming selective, there has been a huge gap in construction finance over the past two years, fund managers said.

Indiabulls Asset Management is in talks with global investors to float a joint venture to lend construction finance to developers, said Ambar Maheshwari, chief executive officer (private equity).

Maheshwari said the Indiabulls fund had been financing construction since the inception of the fund, and it slowed during 2017 to 2020 and that was due to the challenges the residential sector was facing at that time. “With mortgage rates at all-time lows, positive sentiment due to a slowing pandemic, vaccines, and a growth-oriented Union Bud­get, we believe real estate, particularly residential and commercial office, is set to bounce back as evid­enced by record sales in the last quarter of 2020. Hence the renewed focus on construction finance,” he said.

In its planned venture, it would do the heavy lifting in terms of the origination, credit appraisal, and asset management, and the potential partner brings in scale. Its sponsor (Indiabulls group) has also agreed to contribute 10-15 per cent of the capital to the partnership, he said.

Recently, Motilal Oswal Real Estate launched its fifth fund called IREF V with a target of Rs 800 crore, which will focus on construction finance to developers.

Motilal intends to invest this fund in post-approval projects through senior secured lending across top seven cities of the country. “Approximately Rs 60,000 crore of construction finance is required every year. After the IL&FS crisis, there has been a gap in capital availability. While our earlier funds focused on investing in the pre-approval stage, this dearth of capital in the post-approval stage provides an opportunity for a fund like us to enter this space to generate risk-adjusted returns,” said Sharad Mittal, director and chief executive of Motilal Oswal Real Estate.

Vishal Srivastava, president at Anarock Capital, said alternative investment funds (AIFs) were not in the Reserve Bank of India jurisdiction and, therefore, asset quality deterioration would not affect the balance sheet.

Besides, construction from AIFs will be at a higher rate than banks and NBFCs, which are currently not putting in money.

“My sense is that AIF cost would be 250-300 bps higher than a normal construction finance rate,” Shrivastava said.