Realty funds ask for higher cover, turn cautious in lending to developers

Real estate-focused private equity (PE) funds are asking for higher cover and taking a conservative view of cash flow from projects.
 
This is taking place as developers go through a liquidity crunch in the wake of the IL&FS group’s defaults. This led non-banking financial companies (NBFCs) to curb lending for realty developers.
 
Though a handful of PE funds — such as those managed by Motilal Oswal, Kotak, HDFC Capital, and some others — are active in the market, they are now stricter in evaluation of deals.
 
For instance, said Sharad Mittal, executive director at Motilal Oswal Real Estate Investment Advisors, they have specified an additional margin of safety, with lower LTVs (loan to value ratios) in some projects. His entity invested about Rs 300 crore in the past three to four months.
 
Risk cover, he said, had gone up in varying degrees. For structured debt, their return expectation had risen from 18-20 per cent to 21-23 per cent.
 
“Deal flow continues to be strong, both for new and refinancing opportunities for NBFC projects. However, we are treading cautiously and being selective,” he added.

 
Nisus Finance, another Mumbai-based fund manager, has in recent months increased its needed cover to 2.5 tissmes, from two times, the value of the asset. “We believe the value of unsold inventory might come down and it could take longer to collet receivables. That is why we are taking higher cover,” said Amit Goenka, managing director. Nisus did deals worth Rs 150 crore in recent months.
 
Earlier, said Goenka, they were okay with investing in tier-II and tier-III developers. Now, however, they were going only with better quality ones.
 

HDFC Capital, real estate fund management arm of HDFC, is also taking a conservative view on the assumptions regarding sales and cash flow. And, brought in more effective management of escrow accounts, said a source.
It was, however, the source added, not asking for higher cover while doing debt deals. “Asking 100 to 200 basis points more does not matter to us. Risk is defined by quality of projects and developers, not by higher interest. Our main aim is to reduce risk in the portfolio.”
 
In the recent past, HDFC Capital has done platform investment deals with the Bengaluru-based Prestige group, Mahindra Lifespaces and ATS Infrastructure, among others.