Foreign Capital Circles India’s Stressed Real Estate Sector In Search Of Bargains

According to several investment bankers and consultants that BloombergQuint spoke to, international funds, including Oaktree Capital, Varde Partners, Oak Hill Capital Partners, Lone Star Funds and Ascendas India Trust are actively looking to buy existing developer loans at a discount or invest through a mix of debt and equity.

In addition, long-term sovereign and private equity investors like Canadian pension funds, Singapore’s GIC, Blackstone and KKR also continue to be on the look-out for investment opportunities, these people said.

The credit crisis, which was precipitated by the collapse of Infrastructure Leasing and Financial Services in September 2018, has created a big void for the real estate sector, said Sharad Mittal, chief executive officer, Motilal Oswal Real Estate Investment Advisors II Pvt Ltd. The sector is facing a challenge of over-leverage, with over Rs 4 lakh crore in outstanding loans, coupled with slower sales of inventory, Mittal said, adding this gap cannot be bridged by domestic real estate funds.

As such, both developers and non-bank lenders to the real estate sector are looking to foreign capital.

“The certainty of financing has gone away which is why developers are approaching foreign players and alternative investment funds,” said Vikrant Narang, chief executive officer, Ambit Structured Finance Pvt Ltd.

Distressed funds will find good strategic deals in the current environment as lenders look to sell their exposures to risky developers or specific projects, said Prateek Jhawar, director-investment banking at Avendus Capital Pvt. Ltd.

“The NBFC situation has definitely created a lot of acute stress in the system and it does not look like there will be a respite in the next 6-9 months. Some of the largest NBFCs in the real-estate financing space are dealing with their own liability challenges and are recalling their loans from existing borrowers,” said Sanjeev Dasgupta, CEO, Ascendas India Trust. Dasgupta explained that Ascendas is looking at situations where they can refinance existing loans, finance the projects to completion and take ownership thereafter. “We will not consider lending to a project where the property is not interesting for us to own in the long term,” he told BloombergQuint.

A senior executive at another large foreign fund, who spoke on the condition of anonymity, said that the fund is looking at possible loan buyout opportunities as developer financing firms look to sell their exposure. This executive expects loan buyouts to pick up in the coming months and sees the fund’s portfolio growing substantially in India over the next two years.

BloombergQuint reached out to each of the funds named above to seek views on potential investments. Most did not respond to queries.

What Foreign Funds Are Looking For?

While foreign funds continue to see commercial projects as a safer bet, they are also looking at residential real estate.

Jhawar of Avendus Capital said private equity firms are still focusing on structured-debt financing for individual projects, since there are only a handful of developers that are seen as viable for equity investments at the level of the promoter company. He added that while private equity funds remained focused on commercial real estate projects in recent years, the recent liquidity crunch has prompted distressed asset investors and real-estate funds to start looking at residential property deals as well. The number of such deals, however, are limited, said Jhawar.

Dasgupta of Ascendas said that there are a larger number of opportunities in the residential real estate segment, since commercial real estate has seen relatively stronger demand and the rental market has held steady. “We are prospecting actively for investment deals and one or two opportunities have crossed our path which are being evaluated right now,” he said. The strategy, according to Dasgupta, remains focused on debt financing with a clear agreement to purchase the property once construction is done.

Foreign funds in the market would be looking at an internal rate of return of 16-18 percent through such debt structures, Dasgupta said.

The executive from the large stressed asset fund quoted above said that return expectations are in the range of 12-20 percent. The fund is willing to make equity investments, buy out projects from developers or purchase existing loans at par or at a discount from lenders. Commercial properties are a straightforward business and the market is in a good moment right now, whereas residential is a bit more complex given that it is tied to people, this executive said.

What It Means For The Real Estate Sector?

The stress in the real estate sector is unlikely to be short-lived, said most investment bankers and consultants that BloombergQuint spoke to.

As a result of this protracted period of pain, a few trends are likely to emerge, said Shashank Jain, partner-deals at PwC India. The first is that developers want to sell or hive off semi-completed projects to other developers with stronger balance sheets; the second is that developers are happy to monetise and sell their land parcels; and the third is the entry of global distressed funds which are keenly looking at deals in both residential and commercial projects, Jain explained.

“While there are opportunities, we are yet to see large scale transactions taking place,” Jain said.

What has picked up is deals between smaller, stressed and unlisted developers and larger, stronger and listed developers. Many of these deals have taken place through joint ventures and joint development management structures, where smaller developers provide the land while the larger player handles the construction, marketing and sales aspect. According to a Macquarie Research, over 65 million square feet worth of property has undergone a JV or JDM type-consolidation in the last three years. This trend is likely to continue in the current environment.

Mittal of Motilal Oswal believes it’s just the beginning of the unwinding of debt in the real-estate sector, which may last for the next 12-24 months and lead to pain for all stakeholders. “I see the market re-emerging post the current liquidity crisis with two sets of players: First comprising large developers that have economies of scale and good governance practices; and second comprising state or city-based developers that have local knowledge and an established track record,” he said.

Sharad Agarwal, executive director for capital markets at Knight Frank India, said the strong developers are becoming stronger through this environment. Consumer preference has also shifted towards reputed developers and, as a consequence, the sector is becoming more organised, he said.