After a lull, NBFCs looking to step up funding for real estate sector

With a clean-up underway in the real estate sector and tight underwriting standards, finance companies are stepping up funding for projects and developers.

The strong demand in real estate -- residential, commercial, and logistics -- is giving confidence to the likes of JM Finance, Piramal, LIC Housing, and Indiabulls Housing Finance.

Lata Pillai, managing director and head (capital markets), real estate consultancy firm JLL, said: “We see more avenues for developers to get funding. Even the existing lenders are taking a relook at the real estate sector.”

Many of them had paused additional funding owing to the challenges the sector faced. After the IL&FS crisis in 2018, some firms with a substantial exposure to real estate faced a challenge due to funding mismatches. However, that is changing now because many of them have set their books right.

The turn in the real estate cycle has improved the climate for resolving projects that were facing problems in execution and cash flows.

JM Finance Group said it had planned its business and targeted loans of Rs 15,000 crore by FY24. They will be split between Rs 12,000 crore of wholesale assets and Rs 3,000 crore of retail loans. Its wholesale mortgage book was Rs 7,362 crore at the end of March 2022.

JM did not grow its books in the past two-three years and most of the assets have matured. There were a lot of prepayments and refinancing in real estate. It does not see this continuing. The trend of shrinking books will reverse and it expects addition to real estate loan books over one-two years, JM Finance executives said in an analysts’ call after Q4FY22 results.

Indiabulls Housing Finance Company (IHFC), which was rejigging its balance sheet, will enhance wholesale funding through alternative investment funds (AIFs).

Gagan Banga, vice-chairman, managing director (MD), and chief executive officer (CEO), in an analysts’ call said the company had received approval from the Securities and Exchange Board of India for setting up an AIF of Rs 2,000 crore in partnership with a global firm.

LIC Housing Finance, another large mortgage lender, plans to step up project finance and increase the share of such disbursements to 10 per cent in 2022-23 (FY23) from 5 per cent now.

Y Viswanatha Gowd, MD and CEO, LIC Housing Finance, said the current year promised to be better. A hardening interest-rate situation notwithstanding, the economic environment is positive in the country compared to FY21 and FY22.

Cautious approach ahead

Growth will be tempered. Given the caution, the projects that have all approvals with reasonably good counter-parties would be better-placed to get funds.

Pillai of JLL said it was unlikely that lenders would look at complex financial structures to fund projects. They will use simple, plain vanilla, arrangements.

Indiabulls said of the loans disbursed through AIFs, IBH’s participation would be 5-10 per cent, which will remain on the balance sheet.

Ajay Piramal, chairman, Piramal Enterprises, said there had been significant consolidation in the real estate sector over the past three years as also in non-banking financial companies and wholesale lending.

Piramal is among the few that continue to remain strong despite a prolonged, tight environment. The new approach will be more calibrated -- smaller loans, granular books and cash flow-backed lending, Piramal said.

BUILDING BLOCKS

Construction\project finance

• Larger tier-II developers form bulk of the assets under management (AUM)

• AUM concentrated in top 5-7 real estate markets

• Average ticket size more than ~100 crore

• Yield ranges from 13-20%; average of 15%

• Fully secured by project assets/cash flows

Source: ICRA