0. ACAE Chartered Accountants Study Circle - EIRC
Kolkata
Funding Avenues for
Real Estate Sector
Real Estate Conclave - Kolkata
Presented by:
Jayesh Kariya
Partner - International Tax and Regulatory
5 September 2015

1. The journey ahead… 1 Overview 2 Funding Avenues – An Overview 3
Foreign Funding Avenues – FDI/FPI/ECB 4
Domestic Funding Avenues 5
Summing Up

2. Overview

3. Staggering growth in foreign Investments witnessed in 2014-15
Total FDI inflow was US$ Bn (April 2000 – June 2015)
FDI inflow was US$ Bn (Jan, June, ) against US$ Bn in the corresponding previous year (30% growth)
In the PE sphere 350 transactions valued at US$ Bn were announced in first half of FY 2015
The Real Estate space witnessed US$ 34 Mn of FDI investment (April, 2015 – June, 2015)
PE funds have pumped in US$ 1.68 Bn in the commercial and residential real estate in six months ended June 2015, compared to US$ 0.6 Bn a year earlier
FII’s pumped in an astounding INR Bn (Jan – June 2015)
Estimated that foreign investment into real estate in India will increase to US$ 25 billion over the next 10 years
Source: DIPP, NSDL , Cushman and Wakefield Research, VCC Edge Venture Intelligence and Bloomberg

4. Recent funding transactions in news …
Real estate among top favoured sectors for PE and VC investments
Realty major DLF on Monday raised Rs 375 crore through non-convertible debentures (NCDs) as part of its strategy to boost internal cash flows.
The company is also planning to launch two real estate investment trusts (REITs) this fiscal year to monetize its rent-generating commercial assets
DLF Raises Rs 375 Cr Through NCDs
SEBI has allowed 158 entities to set up AIFs newly created class of pooled-in investment vehicles for real estate, private equity and hedge funds in about three years
Among the newly registered AIFs are HDFC Capital Affordable Real Estate Fund, Unicorn India Ventures Trust, Arthveda Affordable Housing Trust and Blume Ventures India Fund
SEBI permits 158 AIF’s to operate in India
Warburg Pincus will be investing Rs 1,800 crore in Piramal Realty for a minority stake at entity level
The capital raised through equity transaction will be used to expand Piramal Realty’s portfolio and acquire land parcels in and around Mumbai
Warburg Pincus to invest Rs 1,800 crore in Piramal Realty
IREF is targeting to raise a total of Rs 1,000 crore under the first scheme of Indiabulls' Alternative Investment Fund (AIF)
The commitment of around Rs 300 crore includes funds raised from high net worth individuals, institutional investors and family offices.
Indiabulls Real Estate Fund raises Rs 300 crore from investors

5. Recent funding transactions in news …
Parsvnath Developers has allotted unlisted, secured, redeemable, non-convertible debentures having face value of Rs 5 lakh each aggregating to Rs 355 crore on private placement basis
The fund has been raised from Edelweiss and it will be used to prepay debt of the company
Delhi-based builder, Parsvnath Developers raised Rs. 355 crore from Edelweiss
Piramal Realty, the real estate development arm of the Piramal Group has said that US investment bank Goldman Sachs has agreed to invest $150 million (Rs 900 crore) for a minority stake in the company
The funds will be used to expand the company’s real estate portfolio and acquire prime properties in and around Mumbai
Goldman Sachs to pick stake in Piramal Realty
Raised Rs.255 crore through a NCD issue from NBFC Indostar Capital Finance Ltd
NBFCs still remain a fairly active lot of investors in the real estate industry and are competing with a number of PE funds who have been doing more debt or debt- equity structured transactions, as they chase developers who are in need for capital
Total Environment Building Systems raised Rs 255 crore from Indostar Capital Finance
Lodha raised Rs.542 crore through a non-convertible debenture sale to Kotak Realty Fund for a portion of the Palava project.
Lodha raised Rs.542 crore through a NCD sale to Kotak Realty Fund

6. Key funding challenges in Real Estate Sector1
Weak financial markets
Weak financial markets limiting developers and institutional lenders to raise equity and debt capital 2
Weak global and local economy
Weak global and local economy restricting flow of equity capital 3
Lack of institutional funding
Lack of institutional funding (the maximum tenure of any capital is about 4 to 5 years leading to multiple rounds of fund raising by developers) 4
Lack of lending sources at initialization and land acquisition stage
Lack of lending sources available to real estate developers to acquire land which accounts for about per cent of a real estate project 5
Lack of organized functioning of industry restricting raising of finance
Unorganized nature of the industry 6
Perception of high risk industry
Perception of high risk industry leads to higher borrowing costs

7. Funding Avenues – An Overview

8. Bank / Construction Finance
Funding Avenues
Close-group Investor funding
LRD for leased commercial properties
PMS – Real estate a preferred asset class
Use of innovative JDAs
FDI
NBFC Funding
Listed NCDs
REIT
AIF
ECB
Bank / Construction Finance
Crowdfunding*
Funding Avenues
*SEBI had issued a Consultation paper on Crowd-funding in July As per the Consultation paper,
the crowdfunding is not allowed for real estate business

9. Funding mechanism in RE sector has gained
depth and maturity over last decade
Major Channels of Financing in Real Estate Development in India
Funding options keep re-inventing supported by ever changing external (local & global economy; country risk; political scenario etc.) and internal (developer credibility; demand supply equation etc.) dynamics of the RE sector
Recently introduced REIT regulations may provide an alternate channel for raising funds offering a structured and perpetual source of capital
Offshore Listing
QIP
IPO
PE Fund
QIP
PE Fund
PE Fund
PE Fund
NBFC Lending
PE Fund
Bank Lending
Bank Lending
Bank Lending
Bank Lending
Bank Lending
NBFC Lending
NBFC Lending
NBFC Lending
Private Lending
Private Lending
Private Lending
Private Lending
Private Lending
Private Lending
Pre-2005
2012
Offshore Listing
ECB
Offshore Listing
Offshore Listing
Offshore Listing
Offshore Listing
IPO
NBFC Lending
IPO
IPO
IPO
IPO
NBFC Lending
ECB
ECB
ECB
ECB
Bank Lending
QIP
QIP
Levels of Activity
High / Medium
Low
Extrinsic and intrinsic factors determine the cost of funding
Extrinsic factors — INR-USD depreciation/appreciation; Country risk; GDP growth; Domestic interest rates etc.
Intrinsic factors — Developer risk; stage of funding; project risk; background of developer etc.
Cost under various funding options
Rapid Increase due to global liquidity crisis
Cost of funds have declined in recent years suggesting improving fundamentals

10. Established / preferred sources of funding
in Indian real estate market
Funding options available at Value Chain Level
Preferred Financing Options by Developers
Stage 3 (construction)
Private equity
Mezzanine debt
Bank funding (12-15% for 4-5 years)
Stage 4 (exit)
REITs
LRD/CMBS (for leverage buyout)
Foreign listing
Stage 2 (approvals)
Private equity (24-25% for 4-5 years)
Mezzanine debt (18-24% for 2-4 years)
Stage 1 (Obtaining land)
Joint Venture (till the end of project)
Private debt (24-30% for 2-3 year)
Outright purchase
Project initiation and land acquisition
(0-2 year)
Approvals
(2-3 years)
Project development (4-10 years)
Handover and operation
Specialized Real Estate Investment Options
Real Estate Mutual Funds (REMFs)
Established in form of trust which invest
directly/indirectly in real estate assets
Real Estate Investment Trust (REITs)
Corporate structure that buys, sell and manage
real estate assets and are publicly traded

11. Foreign Investments in India – FDI/FPI/ECB

12. Foreign Investments in India – An Overview
Foreign Investment in Real Estate
1. FDI Route
2. FPI Route
3. ECB Route
4. NRI Route
Construction Development - PN 10 of 2014
Hotels and Hospitals
Industrial Parks – PN 3 of 2008
Educational Institute/ Old age home
Investment in SEZ (SEZ Developer)
Listed shares of corporate developers
Listed corporate debt:
Overall USD 51 billion investment limit available
Hospitals
Hotels
Units in SEZ
Affordable Housing*
SEZ Developers*
Unlisted securities on repatriation and non- repatriation basis
Direct purchase immovable property other than agricultural property, plantation or a farm house
*Permissible under Approval Route

13. 1st 2nd Key Conditions prescribed in PN 10 of 2014 C O N D I T S Exit
FDI not allowed in
Real Estate Business; or
Construction of Farm House; or
Trading in Transferable Development Rights
1st
Investment-related guidelines
Minimum foreign investment – USD 5 million
Funds to be brought into India within 6 months. Subsequent tranches can be brought till the period of 10 years
Issue of shares within 180 days of receipt of inward remittance C O N D I T S
2nd
Project-related guidelines
Minimum area requirements: no minimum area requirement for serviced plots and 20,000 sq. meters for construction development projects
The Indian Investee company will be permitted to sell only developed plots
PN 10 of 2014 does not apply on investment by NRI’s
Project to comply with norms laid down by state, municipal, etc*
Exit
Exit permissible on completion of project or on development of trunk infrastructure (i.e. roads, water supply, street lighting, drainage and sewerage). Any repatriation of FDI or NR to NR transfer prior to completion of project will require FIPB approval
1st and 2nd condition (except condition to obtain approvals from local bodies) is not applicable where investment is made in JV/WOS which has committed at least 30% of project cost for low cost affordable housing

14. Key Impact Areas of PN 10 0f 2014 on FDI Route
Existing Investments/Projects
Eligibility under new FDI Policy
Applicability of new exit restrictions?
Applicability of minimum capitalization norms - project wise, bringing additional funds, etc.?
New Investments/Projects
Reduced minimum capitalization
Single Company structure vs. SPV structure
Entry and Exit point
Relaxation for Affordable Housing Projects
Key
Impact Areas
Exit through NR to NR Transfer
Approval for NR to NR transfer before completion of trunk infrastructure or project
Unused/ Idle Parcel of Land
Disposal of unused / idle parcel of land permissible through FIPB approval
Completed Projects
Exit from completed projects through FDI route for operation and maintenance

15. Funding instruments for Real Estate sector
How does one Finance Business and Operations?
Funding instruments for Real Estate sector
EQUITY
CCPs
CCDs
Optionally
Convertibles
Redeemables
DEBT
ECB
MEZZ
Capital
Auto Route
ECB, conditions and restrictions apply
Currently, Mezz FDI is permissible only in form of CCPS and CCD
Equity/ADR/GDR
CCPS
CCD
Optionally Convertibles
Debt
Capital structure for the Indian entity needs to be appropriately structured to ensure smooth business operations and also repatriation in a tax and regulatory efficient manner. Appropriate capital structure also helps in addressing control issues

16. FPI Route – Listed NCD No minimum amount criterion
Pricing guidelines not applicable on investment as well as redemption
No end use restriction
Ability to distribute higher coupon (as compared to CCDs)
Redemption of listed NCDs at premium to achieve commercially agreed IRR
Creation of security possible - RBI approval required on case of enforcement of security and repatriation
Tax efficient from developers perspective – can be structured as per project cash flows
Lower withholding tax of 5.41% on interest for FPIs for loan funding between 1 June 2013 and 31 May 2017 (as against tax rate of 21.01% / 21.63%) on the maximum coupon rate not exceeding 500 basis points over the base rate of SBI
Offshore Investor
Project SPV
Overseas
India
Subscription
of Listed NCDs
Registered as FPI
Simplified structure for investment in debt instruments
– tried and tested structure

17. ECB allowed for Affordable Housing Projects
ECB Route
ECB sectoral conditions
Infrastructure
Hospitals (capital stock and includes medical colleges and para medical training institutes)
Hotel Sector
Hotels with fixed capital investment of atleast Rs. 200 crore;
Convention centres with fixed capital investment of atleast Rs. 300 crore; and
Three star or higher category classified hotels located outside cities with population of more than 1 million
Automatic route - USD 750 mn
Beyond USD 750 mn - under approval route
Services
Hotels (other than those covered above), Hospitals (stock-in-trade)
Automatic route - USD 200 mn
Beyond USD 200 mn - under approval route
ECBs cannot be used for the purchase of land
SEZ Developers
Infrastructure facilities
Approval route
Includes ‘Industrial Park’ within SEZ
ECBs may also be raised by companies in infrastructure and service sector from foreign equity holders for general corporate purposes (including working capital) with minimum maturity of 7 years provided atleast 25% of paid-up capital is held by lender
Security of immovable property / securities permissible subject to conditions
Coupon at a higher than all-in cost ceiling – under approval route
Other conditions – Eligible lender, minimum maturity, end-use restrictions, etc to be complied with
Lower withholding tax rate of 5% applicable on interest payable on ECB
ECB allowed for Affordable Housing Projects

18. ECB Allowed for Affordable Housing Projects
Eligible Borrowers –
Developers/ Builders
Registered Companies
Min 5 years of experience
in residential projects
No financial commitment defaults
No litigation in project
Conformity with master plan
Obtain all clearances
Definition of Eligible Project
Atleast 60% of FSI would be for units having max. Carpet area of 60 sq. meters (equivalent to 646 sq. ft.)
SRA projects
Whether eligibility criteria to be satisfied either at Group Level or SPV level
Whether SRA projects needs to satisfy the criteria of 60 sq. meter
Eligible Borrowers –
HFC’s
Registered with NHB
NOF for last 3 FY >= 300 Cr
ECB within HFC’s overall
limit of 16 times of NOF
NPA =< 2.5 % of the net
advances
Max. Loan – Individual buyer –
25 Lakh (Subject to individual
housing unit =< 30 lakh)
ECB Guidelines
No borrowing limit specified for individual developers/ builders
Issues
Merger of two units –satisfy the criteria of 60 sq. meter
End-use Restriction
Proceeds should be utilised only for low cost affordable housing units and shall not be utilised for land acquisition
General guidelines
NHB to act as Nodal agency –will approve the project and forward to RBI
Not permitted to raise FCCB’s under this scheme
All other conditions of ECB applicable
Aggregate limit of USD 1 billion
fixed – subject to annual
review
Whether terraces, common area, balconies, etc. would be included in 60 sq. meter
Total ECB availed is USD million from Jan 15 till July 15 as per RBI website

19. Domestic Funding Avenues

20. AIF Structure Domestic Investors Trustee Investment Manager
Settlor / Sponsor
Investment Management Agreement
Sponsor
contribution
AIF
Investment Committee
Management fees and carry
Investment in securities of unlisted companies or interest in LLP
Investee Co 1
Investee Co 2
Investee Co 3

21. .. SEBI AIF Regulations – Categories of AIF..
CATEGORY I
AIFs with positive spillover effects on economy
Incentives given by SEBI, GOI, or other regulators in India
Includes -
VCF
SME Funds
Social Venture funds
Infrastructure funds
Others – as may be specified
Close ended funds – minimum tenure of 3 years
Not to invest more than 25% of corpus of AIF in one investee co
CATEGORY II
No incentives given by SEBI, GOI, or other regulators in India
Private Equity funds
Debt funds
Other funds (not falling under Category I or III)
Close ended – minimum tenure of 3 years
Not to invest more than 25% of corpus of the AIF in one investee co.
Limited asset-side restrictions
CATEGORY III
AIFs which trade for making short term returns, includes hedge funds / PIPE funds, etc.
Employs diverse or complex trading strategies
Open ended / close ended
Directions to be issued by SEBI for regulation of this category of AIF
Not to invest more than 10% of corpus in one investee co.
Generally real estate fund are registered as Category II – Out of total 158 AIFs registered with SEBI, more than 28 AIFs are real estate fund

22. AIF Tax considerations (Trust structure)
Category I and II AIF (Pass through status - Income exempt under Section 10(23FBB) of the Act)
Category III AIF (Income not exempt under Section 10(23FBB) of the Act)
AIF
Income distributed taxable in hands of investors on accrual basis
Other provisions of Act to apply No
Contributions made to trust revocable? No
Settlement made to trust revocable?
Is it a discretionary or a determinate Trust?
Yes
Yes
Income taxable in hands of contributors
Income may be taxable in hands of Settlor
Discretionary
Determinate
Income of the Trust would be charged to tax in hands of Trustee at MMR i.e. 30%
Income of Trust would be taxed in hands of Trustee as representative assessee in like manner and to same extent as taxable in hands of beneficiaries
Arguable that capital gains rate over-ride MMR provisions in case of discretionary trust
In case of business income earned by the Trust, whole of income would be liable to tax at MMR

23. NBFC Route Key Benefits
Lending possible without any sectoral restrictions
No restriction on rate of interest
Security possible
Easy repatriation of capital
Possible to diversify into other financial services business with domestic clients
NBFC – “QIB” status under SARFAESI
No lock-in for real estate (if NBFC Indian owned and controlled)
Listing possible
Key Concerns
Costlier funding avenue
Not very tax efficient as compared to FDI
Regular filing and other compliances with RBI to be monitored
FDI Entity
Tax efficient jurisdiction
RBI Registered
India
NBFC
Investee company
Loan / OCDs / OCPRs / RPS
Tax efficiency and concentration norms to be evaluated based on commercials

24. REIT - Structure Mechanics:
Sponsor to set-up a trust and appoint an independent trustee
Trust to be registered as REIT with SEBI
Trustee to appoint Manager
Manager to appoint Valuer
REIT to hold / propose to hold commercial real estates assets worth Rs.500 crores
Manager to obtain in-principle approval from stock exchanges for raising funds through initial offer
REIT to raise funds through initial offer from the public, within 3 years of registration with SEBI
REIT to make investment in real estate assets
REIT to generate and distribute 90% of net cash flows to its unit holders
Unit holders can trade in units of REIT on the stock exchange
Investors
Sponsor Contribution
Sponsor
units
Investment
Management agreement
REIT
Trustee
Investment Manager
Investment
Management
fees
SPV
Valuer
Full valuation
Real estate assets

25. REIT– Challenges Tax inefficiency – Not a complete pass-through status
Stamp duty cost on transfer of immoveable property to REIT i.e. 5 to 12 percent depending upon the state in which property is located
Better interest yield on other fixed income products remain deterrent to the retail investors
Soft real estate market conditions (i.e. enhanced transparency and good governance) and asset quality affect the potential for a REIT market

26. Summing Up

27. Summarizing Funding Avenues
Higher funding cost
No easy exit mechanism
Open only for commercial real estate projects and large developers
Tax inefficient and high stamp duty cost
FDI
REIT
Available to high net worth developers
Regulated Market
Not available for Real estate business
Globally accepted
FPI Route
Crowdfunding
Most popular construction finance
Relatively higher cost
End use restrictions
Stringent conditions
Low interest rate
ECB
Bank/ Construction Finance
Less regulated than banks
Security Mortgage
Higher interest rate
Tax inefficiency
Regulated Market
High administrative and compliance cost
AIF
NBFC

28. Developers Due Diligence
Investor’s Expectations ….
Project Due Diligence
Developers Due Diligence
Real Estate Experience
Portfolio of Project Asset
Creditability
IRR of Project and Security
Track Record
Marketability
Management Team
Project Life Cycle
Good Governance
Ease of Exit/Repatriation

29. Selection Parameters
Understanding the funding requirement i.e. size of project, project life cycle, etc.
Nature of the asset class, risk and other factors associated with the Project
Cost of funding and return expectation i.e. IRR, interest coupon rates, YTM, etc.
Evaluating macro and micro economic factors including regulatory policies – Domestic vs International leverage
Tax and cost efficiency for raising finance
Easy exit mechanism to investors
Security enforcement – Principal and interest protection
Regulatory compliances i.e. Obtaining approvals and routine compliances

30. Future Outlook Significant Demand for Affordable Housing
More Transparency and Good Governance
China and Europe Slowdown
100 Smart Cities
REIT and Other Innovative Products
Vision - Housing for All by 2022
Interest Rate Cut
Improving perception as High Risk Industry
Improved Tax and Regulatory Environment

31. Q&A

32. Thank You Jayesh Kariya Partner - International Tax and Regulatory
Ahmedabad
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