Presentation on theme: "Financing Options in Real Estate in India"— Presentation transcript:
1 Financing Options in Real Estate in India An Overview
2 Structure of presentation Users of Capital and NeedsSources and Providers of CapitalFinancing Instruments – A SnapshotFinancing InstrumentsDefinitionsSourcesFeaturesRegulatory TrendsTitle Insurance
3 Users of Capital and Needs Financing for acquisition, refurbishmentsEnd UserAsset Acquisition, Asset Management, RefurbishmentsAsset OwnerDirect Financing, RefinancingFinancerLand acquisition, Development/ ConstructionBridge financingDeveloperNeedsParticipantsGeneric NeedsSeed funding to initiate project/ acquisitionWorking Capital RequirementsRealization of future cash flows at current dateLowering the cost of capitalTax Efficiency
4 Sources and Providers of Capital Private debtPrivate trusts, Private syndicates, HNIsBanks, FI, NBFCs, REIT/REMF, Government bodiesPublic debtPrivate equityReal Estate Funds, VCF, FII, HNI, End Users (through advances)Public equityPublic Offerings , REIT/ REMF, AIM, Pension Funds, Insurance Fund
5 Financing Instruments – A Snapshot Bonds, Term loans, CC limits, Bridge Loans, ECB, Lease Rental Discounting, Asset Backed and Income Backed.DebtPrivate Equity - HNI/ Institutional, Venture Funding, Public listing, REMF/REIT, Preference instruments, End User AdvancesEquityMezzanine funding, CTL, convertible instruments, Mortgage Backed Security (RMBS, CMBS, CMO), option linked instruments, Asset Backed Securities, Collateralized Debt Obligation, Covered Bonds, Convertible Bonds, FCCB.Structured Instruments
6 Definitions – Debt Instruments Debt Instruments can be Income Backed or Asset Backed.They can be fixed rate instruments of adjustable rate instruments.Bonds : Issued by companies to raise debt for funding their capital requirements. Eg – Infrastructure bonds raised by NHAI which also have a tax exemption status. Some of this might be available to township development projects in the future.Term Loans : Loans provided by Banks, FIs as project financing with pre determined payback schedules, rates and tenure and against collateral. The loans are usually structured on a case to case specific basis guided by sectoral exposure norms of the Reserve Bank of India.Cash Credit Limits : This is a facility for funding interim cash requirements subject to a draw down limit. Interest is charged on the amount outstanding and the period outstanding.Bridge Loans : Also known as "interim financing", "gap financing or a "swing loan“, this loan helps to meet short term cash flow requirements till permanent financing is secured. These are short term loans ( < 1 yr) with higher interest rate and some collateral.External Commercial Borrowings (ECB) : The current guidelines allow for overseas borrowings for the infrastructure and construction development sector subject certain guiding conditions. This provides access to cheaper source of funds and is subject to currency risks.Lease Rental Discounting (LRD) : Securitization of future rent receivables.
8 Definitions – Equity Instruments Private Equity HNI/ Institutional : The equity raised is not from the public markets and hence not freely tradable on public exchangesVenture Capital Fund : Type of private equity capital provided by professional, institutionally backed investors to new or growing businessesPublic listing : These could be initial public offerings or further public offerings. A company can use this route to access the public financial markets for raising capital by divesting equity subject to certain entry norms as guided by SEBI.REIT : These raise funds from the public markets and invest either in the real estate either directly (through acquisition of properties) or indirectly (through mortgages)REMF : Also raise funds from the public market and invest in real estate directly in RE properties, MBS, Equity shares/bonds/debentures of listed/unlisted RE companiesEnd User Advances : Funds received in advance from the ultimate owners of the property
9 Equity Issuance Issues Rights Public Private Placement Qualified Institutions Placement (For listed companies)Preferential Issue (For listed companies)Private Placement (for unlisted companies)Initial Public Offering (For unlisted companies)Further Public Offering (For Listed companies)Fresh IssueOffer for sale
10 Definitions – Structured Finance / Hybrid Instruments Mezzanine funding: Typically unsecured, high yield, subordinated debt or preferred stock which is senior only to company’s shareholders.Asset Backed Securities: These securities are backed by a pool of financial assets ranging from mortgages to accounts receivables.Mortgage Backed Securities: Its an ABS where the asset is a pool of Mortgages eg: RMBS, CMBS, CMOCredit Tenant Lease: Landlord sells property to an SPV and the SPV borrows money against a pledge of the rentals. The right to rentals is further divided into classes of securities each being subordinate with higher promised returns. The landlord typically buys back the first loss piece.Second Mortgage: A mortgage on real estate which has already been pledged as collateral for an earlier mortgage. The second mortgage carries rights which are subordinate to those of the first.Collateralized Debt Obligation: typically securitizes a diversified pool of debt assets. These assets, corporate loans for instance, are split into different classes of bonds (known as tranches) that pay investors from the cash flows they generate.Covered Bonds: similar to ABS but the assets remain on the issuers balance sheetConvertible Bonds: A convertible bond is type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio eg: FCCB.Option linked instruments: Instruments with embedded options like call, put, floor, ceiling, floor, collars, convertibility etc.
11 Financing Instruments PastCurrentFutureDebtDebtDomestic Public Equity(REMF / REIT)Refinancing OptionsSecondary Debt MarketsAccess to Overseas Public and Private Debt MarketsHybrid capital from Banks, FIsPension Funds & Insurance FundsAsset and Income backed debtLease rental discountingConsumer mortgageAsset and Income backed debtLease rental discountingConsumer mortgageECBEquityEquityIndividual Private EquityPublic Markets – (limited access)Venture FundsInstitutional Private Equity – Domestic and Overseas.Individual Private Equity
12 Debt Instruments - Features PastCurrentFutureDebtDebtDebtPLR linked interest ratesHigh Recourse – often to promotersAmortization period – Generally 5-7 yearsLow availabilityPLR linked interest ratesHigh Recourse – often to promotersAmortization period – upto 10 years maxLimited availabilityBanks more willing now but stringent norms from RBIOther benchmark linked ratesNon Recourse optionsHigher Amortization periods – 20 – 30 yearsWidespread sources of DebtFlexible exposure normsBond Placements, Tax Credits and other Municipal Finance AlternativesCollateralized Mortgage Pools, Collateralized Debt Obligations and other Credit Derivatives
13 Equity Instruments - Features Instrument Features in the pastCurrent FeaturesFuture Possible FeaturesEquityEquityEquityLimited mainly to High Net worth Individuals and End User AdvancesPublic Equity not widely availableHigh risk perception due to absence of institutional participationVenture Funds both Domestic & Overseas now allowedFDI allowedSuccessful Public Equity raisings in 2006Successful AIM, LSE listings in 2006Guidelines to allow direct access to overseas Public MarketsEquity exposure by Domestic Public Equity sources- life insurance , Pension Funds.
14 Hybrid Instruments - Features Instrument Features in the pastCurrent FeaturesFuture Possible FeaturesHybridHybridHybridMezzanine Funding being exploredFunding with Convertible options being exploredPreferred Equity StructuresRMBSSenior and Junior Mezzanine DebtStraight, Convertible and Participating Second MortgagesSwaps, Options, Caps, Collars, Swaptions, Captions, etcHedging Options
17 Regulatory Trends Norms for Banks RBI has hiked the risk weightage of the commercial real estate exposure to 200% from 150%Risk weightage on home loans increased to 100% from 75%General provisioning requirement for banks on standard advances to residential housing loans beyond 20 lakhs and commercial real estate loans increased to 1% from 0.4%Exposure to SEZ will be treated as exposure to Commercial real estate
18 Regulatory Trends Norms for NBFCs Two sets of Norms for NBFCs investing in Real Estate proposed for those who avail public deposits and those who dont.Under the new norms, finance companies which accept public deposits can not invest more than 10% of their net worth in land or property, except for its own use. At the same time, investment in unquoted shares of a company that is not a subsidiary has to be limited to 10% of net worth.Loan and investment companies are, however, allowed to invest up to 20% of their net worth in unquoted shares.Current guidelines require asset finance companies to ensure that 60% of their loans go to lease and hire- purchase of machinery, the remaining 40% is used by finance companies to fund the real estate sector. If a finance company acquires land or property or unquoted shares in exchange of its bad loans, these assets have to be disposed off by the NBFC within three years.
19 Regulatory Trends REMF SEBI approved the guidelines for REMFs in June 2006Initially REMFs will be Closed endedDirectly in RE properties within IndiaWill disclose NAV on a daily basisMortgage backed securitiesEquity shares/bonds/debentures of listed/unlisted companies dealing in properties and developmentOther securitiesThey can invest
20 Title Insurance Title Insurance Internationally recognised means of covering the title risk in property transactions.Protects owners and lenders against any claims against the title guarantees that the mortgage is valid, enforceable and of first priority.A general insurance policy will usually cover the insured against a future event which may or may not occur.A title insurance policy covers the insured for past events; that there are, for example, no mortgages registered over the land as at the date of the insurance policy.Type of Title InsuranceLenders title insurance, also called a Loan PolicyOwner's title insurance.The availability of title insurance in India will reduce the risk perception of public debt and equity institutions thereby triggering a greater availability of capital