Fund Raising Options for Real Estate & Risks Involved

Real Estate has always been on negative list of Financial Institutions, especially banks, in India. This has become even more common in current day scenario, when industry is passing through its one of the worst phases. Situation has further been worsened because either the funds are not available & if available than at exorbitant cost from Private Financiers.

This is severely affecting the profitability or viability of projects. But most of developers have no other source to complete their already initiated projects.

So here we will try to list down certain options available, which are very reasonable in cost. Developers can explore these. If eligible they can use these routes to raise funds without affecting profitability or viability of a project.

FDI

Post liberalization, investment opportunities in Real Estate via FDI route have opened up. Foreign investors can now purchase or fund under construction Commercial Projects with more than 50,000 sq. mtr. or 540,000 sq ft of developed area or Residential Projects with a minimum size of 10 hectares. Foreign investors can take equity even in an unlisted Real Estate company and become partners to its growth. Listed companies also offer good investment opportunity for Foreign Investors. This investment is comparatively more liquid, thereby reducing risk.

Financial Institutions – Real Estate Mutual Funds

Major financial institutions like ICICI, HDFC, SBI, Kotak Mahindra to name some have launched Real Estate funds. They come in as a JV partner or out-rightly purchase projects.  Most these operate on pan-Indian basis, and are increasingly looking at opportunities in Tier III cities, in order to gain "first mover advantage".

Private Equity/Venture Capital Funds

As per Securities and Exchange Board of India (SEBI), Foreign Venture Capital Investors (FVCI) may invest in Real Estate assets, within the framework of SEBI.

This has paved the way for capital infusion into the market and good amount of foreign capital is now available for good & viable projects. Indirect Real Estate investments are made into a pooled investment fund; such funds are usually created in partnership with domestic developers or financial institutions. Such VC firms, create a potential client base, keen to invest in the Real Estate sector.

Real Estate and Financing Trends in India : Securitization and CMBS

From the perspective of companies who want to sell off assets, securitization schemes provide a greater diversity of alternatives to liquidate property. Securitization is primarily used by the corporate houses to convert  corporate Real Estate to commercial real estate.

Realty Funds/ Realty Mutual Funds in India

Initiated by SEBI, the REMFs true potential would now be tapped after the setting up of REITs. REITs pool various Real Estate assets, including warehouses, buildings, industrial estates and parks, malls, commercial and residential premises and get listed on the stock exchange to enable investors to buy and sell. They offer an opportunity to general investor to diversify their portfolio with small capital. Though SEBI has allowed the creation of REITs in India, they are yet to get listed and become operational. But it will be very soon when we will see them being traded. This will infuse huge amounts in stressed Real Estate market of India

Risks involved in the Real Estate Investment Market

Now let’s try to see some risks involved in Real Estate Investment

Liquidity risk

The Real Estate investment market is still in its infant stage & yet to fully mature. The time required for liquidity of Real Estate property can vary depending on the quality and location of the property.

Regulatory risks

For Real Estate Investment various permissions are required by Foreign Investors like the one from Reserve Bank of India. For capital repatriation, again investors need to seek approval from RBI. Foreign Direct Investment (FDI) currently is limited to very few areas in Real Estate e.g. townships. The REMFs work within the SEBI framework. Being a developing and growing sector, the rules, regulations and legalities see frequent changes, making it a cumbersome investment option for the investors.

Property market transparency risk

The Indian property market has low transparency when compared to the more mature and developed Real Estate markets. Although market transparency has improved, reliable and consistent information on the Indian property market is still not easily available.

There is a need for more professional due diligence and valuation.

Macroeconomic risks:

Interest rates, inflation and exchange rate risks are among the important macroeconomic indicators and have shown high volatility.

Ownership and Land Title Issues, Lack of information coupled with the age old property related issues discourages the investment of the large players in the semi urban and rural areas thus effecting overall growth of the Real Estate sector.

Conclusion :

Indian Real Estate sector promises to be a lucrative market for foreign investors. The Indian realty sector, if channelized properly, could catapult the growth of several other sectors in India through its backward and forward linkages.

However, there are apparent hurdles for domestic as well as foreign investments. Absence of a single regulator to monitor Indian Real Estate market is seen as another risk factor by investors. The SEZ guidelines which are issued by the Commerce Ministry are constantly modified, creating uncertainty.

Since the liberalization of FDI norms, significant foreign investments have flown into real estate; but availability of suitable exit options for such investments is still constrained. Maturity of the Real Estate markets will lead to infusion of foreign investment and adoption of international best practices by Real Estate players. Developers will get more organized, and become more transparent to avail opportunities emerging in the market. 

With the Indian securities market regulator SEBI allowing REIT in India, equity investors will have an exit option available to them. All these factors will contribute in making the Indian Real Estate market more organized and structured, thus providing better investment opportunities.