1. REAL ESTATE FINANCING- OPTIONS & ISSUES
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2. 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 – changing demographics, urbanization, ease of finance
Office Space – IT, Telecom and BPO;
Retail – new retail formats and entry of global brands;
Hotels – domestic business travel and domestic tourism; and Warehouses – organized retailing and requirement of logistic services.
Current annual Indian real estate market size is 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 , 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 INVESTMENTS- CCD/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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6. 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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7. 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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9. BANK CREDIT - LEASE RENTAL DISCOUNTING
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: %-14%
Security: Charge on Property and LTVs are
generally at % of PMV
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11. 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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13. 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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14. 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 funds- prominent 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 non- repatriation 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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17. FDI IN OTHER REAL ESTATE ACTIVITIES
Particulars
Route
Hotels, tourism and hospitals
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
Industrial parks
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
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.
Time-limit of six months from commencement of business
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 through step down subsidiaries
Approval required for investment in holding companies
Approval required to form step down 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 to
Non-resident Investors
Preference shares / debentures to compulsorily convert – Yes
Buyback of equity – Quantum / pricing restrictions apply
Choice of overseas jurisdiction for routing investments
A number of treaties believed to be under review
Will Mauritius, Cyprus treaties be renegotiated ????
Return on Investments
Preference shares – coupon rate benchmarked to SBI Base rate
Debentures – Lack of clarity on maximum coupon rate
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22. FOREIGN INVESTMENTS THROUGH PREF SHARES & DEBENTURES
Particulars
Before amendment
After amendment
Foreign investment through preference shares
Foreign investment through debentures
Preference shares that were redeemable and / or optionally/ partially convertible came
under the FDI regime
Debentures that were not convertible or partially / optionally convertible did not come under ECB 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.
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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23. 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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24. 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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