Last month, Piramal Fund Management offered an open line of credit to select real estate developers in five cities: Mumbai, Delhi, Bengaluru, Pune and Chennai. While commercial banks provide overdraft facility to companies regularly, this kind of an open credit line from a non-banking finance company, or NBFC, is unheard of.
PIRAMAL FUND MANAGEMENT
AUM: Rs 18,000 crore
Key exits: Omkar’s Mumbai residential project last year with 24 per cent returns in 2015
KOTAK REALTY FUND
AUM: Rs 7,580 crore
Key exit: Mumbai project of Sunteck Realty with 22 per cent returns this year
AUM: Rs 3,500 crore
Key exits: Rajesh Lifespaces project in Mumbai with 26 per cent returns this year
MOTILAL OSWAL REAL ESTATE FUND
AUM: Rs 1,500 crore
Key exits: A project of Mahaveer Developers with 30 per cent returns this year
Piramal Fund said it would lend Rs 15,000 crore in all to eight to 10 developers over the next 18 months. While each developer will get a minimum of Rs 1,000 crore, no upper limit has been set on the loan. They will be charged interest in the 12-20 per cent per cent range, against the 14-20 per cent charged by others NBFCs. For cash-strapped developers, this indeed is good news.
The latest initiative comes after Piramal Fund launched the Indiareit Apartment Fund in October 2014, which aims to help builders (of residential apartments) tide over liquidity issues in return for apartments at a discount.
This makes Piramal Fund the most aggressive player in the real estate market. Piramal Fund's assets under management have gone up from Rs 5,300 crore in 2013 to Rs 18,000 crore now. It hopes to expand the portfolio to Rs 22,000 crore by the end of the month.
This sure is big. Piramal Fund's closest rival, Altico Capital, which is also focused on real estate and is promoted by Clearwater Capital, Abu Dhabi Investment Council and Varde Partners, is looking to deploy Rs 2,500 crore every year in the Indian real estate market over the next five years.
As sales slow, and banks turn reluctant to lend to the real estate sector, thanks to the huge oversupply which has caused a glut-like situation across the country, NBFCs have emerged as the last resort for developers. This demand is estimated at $15 billion per annum. This is the opportunity Piramal Fund wants to tap into.
Piramal Fund has turned aggressive when real estate prices have gone through a serious correction. It perhaps thinks this is the right time to invest in the sector, when the cycle is at its lowest ebb, and that the prospects for the real estate sector could improve in the days to come.
Given its strong cash reserves, Piramal Fund plans to deploy its own money, instead of funds raised from investors. The sale of Piramal Healthcare's pharmaceutical solutions to US-based Abbott Laboratories for $3.72 billion in 2012 and the group's stake in Vodafone for $1.48 billion in 2014 have provided it with adequate financial muscle.
That Piramal is deploying its own money allows it to offer interest rates that others can't afford to match, says the CEO of a real estate-focused NBFC who does not want to be named.
The success, or otherwise, of the latest initiative will depend on Piramal Fund's ability to pick the right developers: those who are better placed than others, are doing well operationally and have steady cash flows from projects. It is this group of developers with good credentials and a reputation of timely payment of interest that Piramal Fund is banking on.
In fact, so confident is Piramal Fund of picking the right developers that it has decided to be flexible with the end use in these debt deals as long as the repayments are on time and backed by assets.
Anyway, once the real estate Bill becomes law, the assessment of projects is expected to become transparent. The propensity of developers to use money meant for one project to buy land for another will also get curbed as they will be required to set aside 70 per cent of the money in an escrow account. That will also check delays in the execution of projects.
Also, while banks do not fund land deals, Piramal Fund covers land deals too, though at a slightly higher rate. So a developer can get equity capital to buy a certain piece of land at 20 per cent interest, construction finance at a cheaper rate (12 per cent) and also has the option to lower the cost of funding by converting equity into structured debt (at 16 per cent) once the project takes off.
"The returns in real estate are good and lending is backed by hard assets. That's why being cash rich they are tapping these opportunities," says the CEO of a Mumbai-based NBFC. On an average, private equity funds have earned over two times their investments in real estate in the recent exits.
Not surprisingly, then, Jijina is focused on large deals. "We will not do small deals," he says. "Our vision for this business is to become the first port of call for our choice of Tier 1 developers."
Sanjay Dutt, managing director, Cushman & Wakefield, gives his thumbs up to Piramal's strategy. "Piramal Fund is the new HDFC in the market... It has a great leader who is capitalising on market opportunities," he says.
However, has Piramal Fund grown its book faster than it should have? Real estate being a risky asset class, the company should have gone slow, says the managing director of a Mumbai-based financial services company who does not want to be named.
"I do not understand where is the need to grow so fast? This huge concentration of funds to real estate is unheard of in Indian financial services segment. It remains to be seen as to how it pans out over the next 18 months," he adds.
Jijina, however, is not worried. "We believe that growth in our loan book is the result of a careful, measured and studied approach in picking the right partners and the right projects at the right stage; we are extremely selective and careful in our underwriting and believe that there is further room for growth in this business," he says.