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REAL ESTATE FINANCING- OPTIONS & ISSUES EURO CORPORATE SERVICES 1.

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Presentation on theme: "REAL ESTATE FINANCING- OPTIONS & ISSUES EURO CORPORATE SERVICES 1."— Presentation transcript:

1 REAL ESTATE FINANCING- OPTIONS & ISSUES EURO CORPORATE SERVICES 1

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 EURO CORPORATE SERVICES2

3 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 EURO CORPORATE SERVICES

4 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 EURO CORPORATE SERVICES4

5 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 : EURO CORPORATE SERVICES Source: ET dated 29 th nov,

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% EURO CORPORATE SERVICES6

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. EURO CORPORATE SERVICES7

8 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 EURO CORPORATE SERVICES 8

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. EURO CORPORATE SERVICES9

10 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: 11%-14%  Security: Charge on Property and LTVs are generally at % of PMV BANK CREDIT -LOAN AGAINST PROPERTY 10

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 EURO CORPORATE SERVICES Maximum Loan Amount:  Corporate engaged in hotel, hospital & software sectors: Up to USD 200 Million  Real sector ( Industrial & Infra): up to USD 750 Million 11

12 Tenure:  Up to USD 20 Million: Min Avg maturity of 3 years  Above USD 20 Million: Min Avg maturity of 5 years EURO CORPORATE SERVICES ECB - GUIDELINES Cost: Average maturity periodAll-in-cost Ceilings over 6 month LIBOR Three years and up to five years350 basis points More than five years500 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. 12

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) EURO CORPORATE SERVICES13

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. EURO CORPORATE SERVICES Major Players  Sun Apollo  Wells Fargo  Morgan Stanley Real Estate  Goldman Sachs Real Estate  GIC, Singapore  Blackstone 14

15 FDI IN REAL ESTATE ParticularsNRIOther 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 EURO CORPORATE SERVICES15

16 FDI -REGULATIONS ParticularsRegulations 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) EURO CORPORATE SERVICES 16

17 FDI IN OTHER REAL ESTATE ACTIVITIES ParticularsRoute 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 EURO CORPORATE SERVICES17

18 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 EURO CORPORATE SERVICES 18

19 KEY ISSUES IssueViews/ 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 EURO CORPORATE SERVICES 19

20 EURO CORPORATE SERVICES 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 KEY ISSUES 20

21 KEY CHALLENGES IssueKey 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 Euro Corporate Services 21

22 FOREIGN INVESTMENTS THROUGH PREF SHARES & DEBENTURES ParticularsBefore amendmentAfter 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. EURO CORPORATE SERVICES22

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. EURO CORPORATE SERVICES23

24 Real Estate Mutual Funds ( REMF) EURO CORPORATE SERVICES 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 24

25 EURO CORPORATE SERVICES25


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