In today’s scenario, when the global capital market is going through a crunch, raising funds from different means could be the answers to the need for uninterrupted cash flow in real estate development. Developers suffering from the cash crunch are raising funds by various means including issuance of further securities to people other than the existing equity shareholders of the company and also by way of qualified institutional placement (QIP) to qualified institutional buyers (QIBs). The scenario of raising funds through this route is taking toll these days, today many Indian realtors are collectively raising more than Rs 25,000 crore to fund their plans.
Ever since the SEBI had approved the guidelines for the real estate mutual funds (REMFs), it had opened a new vista of investment opportunities in the real estate market of India that offers a lucrative investment option. The SEBI guidelines allow the funds to be invested in the equity of public listed or privately held real estate developer companies as much as 65 per cent of the fund size thus providing significantly higher returns to investors.
Raising funds by means of issuing securities to qualified institutional buyers (QIBs), provides multifold benefits to the developers, investors and economy as a whole including lower cost of capital, greater transparency, beneficial impact on financing arrangements which means less reliance on short term debt, participation in ownership of real estate which will indirectly have a positive impact on employment, education and GDP growth.
These funds are investment vehicles in which retail investors obtain the benefits of a diversified portfolio, combining the best features of real estate and stocks, giving an investor a practical and efficient means to include professionally managed real estate in his portfolio. Given these advantages, these are among the most lucrative investments even for small investors and can help in mopping up large sums which in turn provides the much needed financial impetus to a company.
The route to issuing securities to qualified institutional buyers (QIBs) and preferential allotment of warrants to promoters are giving a much needed push to the Indian real estate business by improving the supply of housing in the urban areas and meeting demand.
Shobhit Agarwal, Jt. MD - Capital Markets, JLLM:
There is much to feel enthused about. The pronounced cash crunch that had held the sector to ransom until recently is finally beginning to relent on the heels of the election-induced improvement in market sentiments. Despite the gloom, QIB have been waiting on the sidelines over the last six months to enter the potential-rich Indian real estate market – these have now begun flowing into the system. With the return of positive sentiments and real estate valuations at an all-time low, it becomes an attractive proposition for QIB to subscribe to the QIP of real estate companies
The current trend is towards preferential allotment towards investors rather than to promoters. DLF and Unitech were the first to place QIPs, and these were oversubscribed in an emphatic underscoring of the return of positive market sentiments. The fact that smaller players such as Parsvanath, HDIL, Akruti, Shobha and Purvankara are now following in their footsteps comes as a natural and logical extension.
Until these market developments, liquidity was a real issue in the sector. Debt was extremely difficult to come by, the equity markets were completely subdued and even private equity players were not investing. Moreover, sales were not happening. The market had virtually ground to a standstill as far as healthy cash flows were concerned. The wheels have started turning again now. With the return of liquidity, developers will be able to complete projects, and sales will pick up. In turn, banks will have greater comfort levels as far as funding real estate projects are concerned.
All said and done, the QIB factor is ensuring that the turnaround for Indian real estate is coming about much sooner than expected.
Sachin Sandhir, MD, RICS India:
Favourable circumstances including dismal performance of realty stocks in past 6 months, followed by the recent surge have made real estate attractive for institutional buyers. QIPs are an equally viable option for listed players reeling under severe liquidity problems and huge debt burden, as SEBI guidelines for QIPs, allow capital to be raised with relative ease and speed through this route. Though debt restructuring helped postpone re-payments, most developers still have debt service deadlines nearing and with alternatives such as FCCBs, ECBs not being feasible in current environment, developers are left with no other option but to dilute their equity to raise capital. Realty players would ideally like to split QIP funds between debt payments and investment in existing projects to en-cash on improving customer demand, however, qualified institutional buyers will be seen insisting that money is used to retire debt first.
Source:ExpressEstates.in