Transcript REAL ESTATE FINANCING- OPTIONS & ISSUES BY: EURO …

REAL ESTATE FINANCING- OPTIONS & ISSUES
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INTRODUCTION : REAL ESTATE IN INDIA
The asset classes in real estate sector can
be divided into :
 Residential
 Commercial/IT offices
 Retail
 Hospitality segments
 Industrial Parks/SEZs
Warehousing
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SECTOR DYNAMICS
Driving Force
Residential
Office Space
Retail
Hotels
Warehouses
– changing demographics, urbanization, ease of finance
– IT, Telecom and BPO;
– new retail formats and entry of global brands;
– domestic business travel and domestic tourism; and
– organized retailing and requirement of logistic services.
 Current annual Indian real estate market size is estimated @ US$ 40 bn
• Residential 70%
• Commercial segment 25%
• Organized retail, industrial warehouse and hospitality combined at 5%
 To promote institutional funding in the sector FDI norms were relaxed in 2005 ( Red Tape to Red
Carpet)
 During 2005-10, industry recorded growth of 30% CAGR and is concentrated in the top 7 metros.
 7 cities account for approximately 70-75% of Grade A office space in the country, with a leased
space of around 279 MM sq.ft. ( as against 373 mm sq.ft in Manhattan , London is 210 mm sq.ft.)
 Indian real estate market is expected to grow at a CAGR of 20%, with an estimated market size of
US$ 180 bn by 2020
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FINANCING OPTIONS
• BANK CREDITS:
-CC/OD/ PROJECT LOAN
- FACTORING
- LC/BG(Non fund Based)
- LRD
- LAP
• EXTERNAL COMMERCIAL BORROWING (ECB)
• PRIVATE EQUITY- DOMESTIC FUNDS
• FOREIGN DIRECT INVESTMENTSCCD/CCP/EQUITY
• FCCB/ADR/GDR/QIP(For Listed Co.’s)
• Listing in International markets such as AIM
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BANK CREDIT - GENERAL
Lending by Banks continues to be the biggest sources of financing for real
estate companies in India.
They also finance the real estate sector by providing housing loans to
individuals. Banks provide indirect finance to real estate sector by giving loans to
housing finance institutions.
Some of the prominent Indian Banks lending to real estate are :
Source: ET dated 29th nov, 2012
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BANK CREDIT – CC/OD/ PROJECT LOAN
• Purpose: To meet working capital requirements.
• Amount of facility: Based upon the Bank's
assessment of the working capital requirement (WIP
& book debts)
• Security:
 Charge on current assets
 Collateral(s) on case to case basis.
• Interest Rates: 12% -16%
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BANK CREDIT – FACTORING
Factoring is a service that covers the financing & collection of
account receivables of series of trade transactions between a seller
& a buyer in the domestic market as well as international market.
Advantages:
• It is among the quickest way to get advance cash.
• Cost effective with the cut in invoice processing and collection
activities.
• Getting cash with factoring helps in eliminating the risks of bad
debts.
• It helps the company in concentrating over more projects.
• It gives an opportunity to offer credit to customers.
• It helps in building credit history and no long-term obligation.
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BANK CREDIT – LC/BG
 Letter of credit(LC) is a written undertaking by a bank( issuing
bank) given to the seller (beneficiary) at the request and in
accordance with the instructions of buyer (applicant) to effect
payment of a stated amount within a prescribed time limit
and against stipulated documents provided all the terms and
conditions of the credit are complied with.
 Bank guarantee is a type of guarantee in which a bank
promises to repay the liabilities of a debtor in the event that
the debtor is unable to.
The contract of guarantee has three parties Principal Debtor,
Principal Creditor, Guarantor i.e. Bank
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BANK CREDIT - LEASE RENTAL DISCOUNTING
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Lease Rental Discounting (LRD) is a type of Term Loan offered against rental
receipts derived from lease contracts with corporate tenants.
Quantum:
Based on the discounted value of the rentals
50% to 75% of underlying property value.
Maximum Tenure: 9-15 years ( Linked with lease period, lock in period,
quality of tenant etc.)
Repayment Mode: Generally Rentals are payable by the tenant directly to
an escrow account with lending bank.
Security: The underlying leased property will be taken as prime security.
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BANK CREDIT -LOAN AGAINST PROPERTY
Loan against property is similar to other loans like
home loan, Equipment Loan etc.
Quantum of Loan: Depends on type of property &
income of the borrower
Tenure:
Flexible for 1 – 15 years
Interest Rates:
11%-14%
Security:
Charge on Property and LTVs are
generally at 65- 70% of PMV
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EXTERNAL COMMERCIAL BORROWINGS ( ECB)
•
ECB allow corporate to access the foreign currency loans through commercial
bank in the form of loans,suppliers’ credit, fixed rate bonds, non-
convertible, optionally convertible or partially convertible preference
shares availed of from non-resident lenders.
 Since January 2009, ECB route has been opened for the development of Hotel
projects, integrated townships & Industrial Parks.
 For Industrial Parks ECB is allowed under automatic route while for SEZ &
Integrated township development ECBs is allowed under approval route.
 Real Estate companies like Jai Prakash Associates, Unitech, HDIL and AMR
Construction, etc. have used ECB to raise funds.
ECB - GUIDELINES
Maximum Loan Amount:
Corporate engaged in hotel, hospital & software sectors: Up to USD 200 Million
Real sector ( Industrial & Infra): up to USD 750 Million
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ECB - GUIDELINES
Tenure:
 Up to USD 20 Million: Min Avg maturity of 3 years
 Above USD 20 Million: Min Avg maturity of 5 years
Cost:
Average maturity period
All-in-cost Ceilings over 6 month
LIBOR
Three years and up to five years
350 basis points
More than five years
500 basis points
Prepayment:
Prepayment of ECB up to USD 500 million may be allowed by AD
Banks without prior approval of RBI subject to compliance with
minimum average maturity period as applicable to the loan.
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PRIVATE EQUITY- DOMESTIC FUNDS
 Private Equity players have been very active in the real estate sector
especially in housing from the past few years (2005 onwards).
 Besides Equity, structured debt-like instruments are used in light of
volatility this industry faces.
 Major Domestic Players in India:
• ICICI Ventures
• IDFC
• HDFC
• IL &FS
• Kotak Private Equity
• Urban Infra RE Fund (Jay Corp)
• Indiareit (Piramal Group)
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FOREIGN DIRECT INVESTMENTS
• FDI are investments made
in home country by foreign
investors.
• Total FDI in India’s housing and
real estate sector till date is about
19 bn USD
• Besides the Foreign Funds there
are certain Indian Fund houses
which have raised foreign capital
and are sponsoring FDI fundsprominent names are Tata,
Piramals, Sun Group, ILFS.
Major Players
Sun Apollo
Wells Fargo
Morgan Stanley Real Estate
Goldman Sachs Real Estate
GIC, Singapore
Blackstone
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FDI IN REAL ESTATE
Particulars
NRI
Other non-residents
Direct investment
in immovable
property
Possible –
Purchase of agricultural land
/ plantation / farm house
excluded
Not possible –
However foreign companies are
allowed to acquire immoveable
property with approvals, for branch
office & places of business.
Investment in SPVs
- Investee entity
Partnership firms / sole
proprietorship (on nonrepatriation basis)
•Companies
•Only companies
Nature of real
estate activity
•SPV cannot engage in
agriculture / plantation / real
estate business (dealing in land
/ immovable property)
•Housing, townships, infrastructure
•Hotels and tourism
•Industrial parks
•SEZs
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FDI -REGULATIONS
Particulars
Regulations
Minimum area of
development
•Serviced housing plots –10 hectares(1 lakh Sq mtr)
•Construction – development projects - 50,000 sq meters
•Combination projects – either of above two conditions to be
met
Investment limits
•WOS – min capitalization of US$ 10 million
•JV with Indian partners – US$ 5 million
•Investment within six months of business commencement
Lock-in restrictions •Original investment locked-in for 3 years from the date is in
brought-in( However, the FIPB has clarified that the
definition of original investment is the entire investment)
Project
development
•50% of the project to be developed in 5 years from the date
of obtaining statutory approvals. (under-developed plots
cannot be sold)
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FDI IN OTHER REAL ESTATE ACTIVITIES
Particulars
Route
Hotels,
tourism and
hospitals
Industrial
parks
•100 percent permitted under automatic route
•Hotels include restaurants, beach resorts and
other tourist complexes providing
accommodation and/or catering and food
facilities to tourists
•100 percent permitted as per the Industrial Parks
Scheme, 2002
SEZs
•100 percent permitted as per the SEZ policy
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PRICING GUIDELINES
•
•
Subscription of shares by Non-Resident
– Issue price shall not be less than:
• In case of listed companies- Price worked out as per SEBI guidelines.
• In other cases- Fair valuation of shares worked out and certified by a
Chartered Accountant.
Transfer of shares
– By Non-Resident to Resident: Sale price shall not be more than
• Listed company
– Transaction through a stock exchange - prevailing market price
• Unlisted company
A price which is lower of:
– Independent valuation of share by statutory auditors of the company
– Independent valuation of share by a Chartered Accountant or
Merchant Banker ( the mechanism prescribed for the valuation is
DCF)
– By Resident to Non-Resident – Pricing shall be same as in case of subscription
of shares by non-resident
– Non-Resident to Non-Resident : No price restrictions
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KEY ISSUES
Issue
Views/ challenges
Minimum capitalisation
norms
Would acquisition of existing shares from promoters be
considered towards the minimum capitalization norms
Lock-in requirements
Time-limit of six months from
commencement of business
Meaning of ‘original investment’ for the purposes of lock-in
requirements:
Would the entire investment be locked-in for 3 years
Would investment up to the min. capitalization be locked in
Would lock-in apply only for the 1st tranche of investments
FIPB has clarified that the definition of ‘original investment’ is
the entire investment and each tranche which is locked in from
the date it is brought-in. However, FIPB can grant a specific
approval on case to case basis.
Does it imply that investments may only be made in newly
incorporated companies- Not necessary
Impact on enterprise-level investments- No
Do all non-FDI-compliant projects need to be hived off - Yes
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KEY ISSUES
Execution of projects Approval required for investment in
through step down holding companies
Approval required to form step down
subsidiaries
subsidiaries for project execution
Project execution
through partnership
firms
Is this permitted? Not permitted
Does it require approval- Yes
Hive-off / de-merger
of projects
subsequent to
investment
Does it imply that minimum area
requirements are not complied with –
Need to comply
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KEY CHALLENGES
Issue
Key challenges
Investment in
companies holding
agricultural land
• FDI policy prohibits investment in agricultural land / plantations
/ farm houses – FDI may have to come in only after conversion
of agricultural land.(But ok if in development zone of master
plan)
Repayment of Investment • Preference shares / debentures to compulsorily convert – Yes
• Buyback of equity – Quantum / pricing restrictions apply
to
Non-resident Investors
Choice of overseas
jurisdiction for routing
investments
• A number of treaties believed to be under review
Return on Investments
•Preference shares – coupon rate benchmarked to SBI Base rate
•Debentures – Lack of clarity on maximum coupon rate
• Will Mauritius, Cyprus treaties be renegotiated ????
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FOREIGN INVESTMENTS THROUGH PREF SHARES
& DEBENTURES
Particulars
Before amendment
After amendment
Foreign investment
through preference
shares
• Preference shares that were
redeemable and / or optionally/
partially convertible came
under the FDI regime
Any preference shares issued after 1st May,
2007 to be part of equity only if they are
compulsorily convertible. In all other cases,
they will be considered as debt and will have
to comply with the ECB guidelines.
Also, existing investments in such shares may
continue till their current maturity.
Foreign investment
through debentures
Debentures that were not convertible
or partially / optionally convertible did
not come under ECB regime
Only fully and mandatorily convertible
debentures, within a specified period of time,
would be reckoned as FDI; all other
debentures would be regarded as ECB.
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FCCB/ADR/GDR/QIP(For Listed Co.’s)
 Qualified Institutional Placement (QIP) route offers a cost-efficient way
of raising funds from the domestic institutional investors, thus
offering an attractive alternative when overseas borrowings dry
up. This mode of fund raising has lesser procedural requirements. Real
estate companies that have raised money through the QIP route
includes Unitech, Parsvnath Developers, HDIL, DLF etc.
 Foreign Currency Commercial Bond (FCCB) is a mix between a debt and
equity instrument issued in a currency different than the issuer’s
domestic currency. It acts like a bond by providing regular coupon and
principal payments but at the same time gives bondholders the option
to convert the bond into stock.
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Real Estate Mutual Funds ( REMF)
Real Estate Mutual Funds – Introduction
In simple terms, Real Estate mutual funds are close ended mutual funds with a
lock-in period of 3 years. These mutual funds will invest in real estate properties
and being the owners of these properties, they will let out these properties on
rent. The rent so earned will be distributed to investors as dividend. When the
mutual fund attains maturity, the company can sell its holdings and return your
investments.
SEBI has kept the scope of the REMF wide open, as the guidelines allow REMF to
invest in the following sectors:
• Directly in real estate properties within India
• Mortgage (housing lease) backed securities
• Equity shares of companies which deal in properties
• Other securities like debt instruments
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