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Property financing options in India have significantly evolved. As the property market has matured, the capital market for equity in real estate projects has gained greater prominence.
Some standardisation of entry pricing is occurring. Previously, the stock holders of the market (developers and landlords) quoted prices driven purely by speculation. With the entry of organised operators (largely private equity funds), entry prices are now determined more by the expectations of returns, which are a product of project returns. This has brought greater comfort for institutional investors.
The popularity of equity financing has been further enhanced by tightening of debt markets, both domestic and external. The Reserve Bank of India has time and again taken measures such as increasing provisioning and risk weighting on loans to the property sector.
All this has resulted in a higher cost of debt financing for developers and end users. External commercial borrowing, a preferred funding source given its cheaper cost of capital, has been disallowed for the sector and the ceiling on interest rates has been lowered on such debts, making it difficult for small operators to borrow.
The Indian public equity markets have also been witnessing increased interest from developers. Although the public issue markets have not matured for property, there has been an increased focus on this financing avenue.
Encouraged by increased public interest, last year saw successful domestic initial public offerings, including those of Sobha Developers and Parsvanath Developers, while issues by Omaxe and DLF are in the pipeline.
Public listing and the attractiveness of private equity have moved the industry a step closer to bringing in disclosure and corporate governance requirements that would increase transparency and make this rising sector more organised. They can also act as a source of raising future capital and provide secondary market exit options, which currently are scarce in the Indian market.
In addition to IPOs and private equity, overseas listing is gaining interest thanks to a surge in interest from global investors, largely due to sustainable end-user demand and higher return potential.
The Alternative Investment Market (Aim), a sub-market of the London Stock Exchange, has proved to be a successful funding platform. The main appeal for Indian property developers lies in its friendly listing process as well as the support this market provides. Earlier this year, Ishaan Real Estate raised £180m ($360m) on Aim and was followed by Unitech, which raised £360m by listing its new property investment arm, Unitech Corporate Parks. Several other India-specific funds and developers are exploring this route.
Clearly there are gaps in the capital market in real estate that could be mitigated by introducing, for example, real estate mutual funds (REMFs) and investment trusts, domestic secondary debt markets and hybrid capital availability via banks and other financial institutions.
The approval of REMFs by the Securities and Exchange Board of India (SEBI) and its consideration of allowing securitised debt instruments are paving the way for a mature and structured capital market. SEBI is soon expected to announce guidelines on REMFs that would help in creating value-added, stable income-generating products and offer an entry/exit route for investors.
Development of property capital markets in India will depend on secondary market exit options being available for investors. This is imperative to sustain momentum and meet the future capital requirements of the industry.
The author is executive managing director, south Asia, for Cushman & Wakefield
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