What PE funds bring to developers

Ireo Gurgaon Hills

Ireo Gurgaon Hills

The real estate sector is very capital-intensive and developers have to manage large cash flow mismatches. The long development cycle — starting from acquiring land, planning, getting approvals to start construction to final sale and hand-over — takes three to five years or more, based on the locality.

The cash-strapped developers, who are typically saddled with a large debt burden, are usually on the look-out for new funding sources.

Fund sources

The cheapest source of funds is from banks and institutions such as HDFC and ICICI which offer construction financing at around 15 per cent. NBFC funding ranges anywhere between 18 and 21 per cent, according to Shreekant P Shastry, VP, Strategy and Business Development, Ozone Group. Developers also take private funding with an average interest rate of around 24 per cent.

Need for PE

While the bank rates are lower, they only lend at the construction stage, after all the approvals are obtained.

However, there is a delay of one to two years between purchasing land and getting all the approvals necessary to start building.

This is where PE funds come in, to take care of initial cost of project development, says Bharat Dhuppar, CMO, Omkar Realtors and Developers.

Read more: Business Line

Property without pain

Many of us shy away from buying property because we worry about monitoring the investment. If you have Rs 1 crore or more to invest, private equity (PE) funds that invest in real estate offer an alternative. But analysis suggests that that while these funds reduce risk through diversification and better due diligence, their returns may not beat traditional property investments.

How they work

Real estate private equity funds are close-ended, typically with a time horizon of six to eight years. The funds target three main sources for raising capital — promoters, network of friends/family and high net worth investors (HNI). The minimum investment amount is Rs 1 crore, according to SEBI guidelines. The funds operate on a 2/20 model, with 2 per cent annual management fee and a 20 per cent profit share or “carry”.

The fund may take a few years to deploy capital and the timing of returns depends on the property invested in. For example, rents from commercial property may begin to flow in immediately, but the return of capital from a sale may take long. The term of the fund may also be extended if the projects are delayed or favourable exits are not made.

Read more: Business Line

Real estate regulatory bill must cover all stakeholders: CREDAI

Terming real estate regulatory bill as a populist measure, realtors’ body CREDAI on Wednesday said the proposed law should govern all stakeholders of the industry and not only the developers.

The Real Estate (Regulation and Development) Bill, to be introduced in the next session of Parliament, will further increase the cost of development and delay projects, the association said.

“We want regulator. But like regulators in other sectors such as telecom and insurance, it should govern all the stakeholders,” Confederation of Real Estate Developers Association of India (CREDAI) Chairman Lalit Kumar Jain said at an Assocham conference.

The planning authorities, banks and other government authorities do not come under this legislation, he added.

“It (the bill) is a populist measure that will please consumers. Bring regulator with proper design and understanding of business,” Jain said.

He noted that developers already have to take a number of approvals from various government authorities that take anywhere between 6-18 months and now they would have to register their projects with regulators.

Read more: Zee News

Economy

FDI approvals to boost Indian economy: CII

The series of foreign direct investment proposal approved by the Union Cabinet in key areas of defence, insurance and telecom along with others would provide the much needed boost to the Indian economy, a top Indian industry leader has said.

“It is good news for India, a very bold and a significant step,” Chandrajit Banerjee, Director General of the Confederation of Indian Industry (CII), said.

The announcements of reforms have come at a very important time, because the country is facing various challenges in terms of growth and deficit, he said.

“This would really help both in terms of improving in terms of our revenue, in terms of our investment and in terms of Indian companies to grow,” he said.

Banerjee is leading a high powered delegation of Indian CEOs to the US for a week-long trip during which they have been meeting senior government officials, lawmakers, think tanks and members of the industry.

Banerjee said the Indian industry welcomes the move as efforts were going on for quite some time to push FDI in telecom, defence and insurance sector.

“For quite some time, we have been talking about reforms to be pushed and continued. We have been talking about FDIs in certain specific areas and today telecom is a big announcement,” he said.

Read more: Business Line

Infrastructure

EGoM to ensure speedy implementation of development projects in Northeast

Prime Minister Manmohan Singh has set up an Empowered Group of Ministers (EGoM) to ensure speedy implementation of infrastructure development projects and explore ways to boost the economy of the northeast.

Minister for Development of Northeastern Region (DONER) Paban Singh Ghatowar said the EGoM, to be headed by Finance Minister P Chidambaram, will suggest measures for effective coordination among various central ministries to implement major infrastructure projects.

“The Prime Minister has appointed the EGoM to address various issues concerning the northeastern region,” Ghatowar told reporters after concluding session of the the 62nd North East Council (NEC) Plenary meeting here.

DoNER officials said members of the EGoM include Power Minister Jyotiraditya Scindia, Home Minister Sushilkumar Shinde, Civil Aviation Minister Ajit Singh, Road Transport Minister Oscar Fernandes and Ghatowar.

Read more: The Economic Times

Government to speed up Rs 1 lakh crore infrastructure projects

The government has asked state-run lenders to identify potential bottlenecks in 50-odd newly sanctioned infrastructure projects, seeking to fast track projects with a total outlay of Rs 1 lakh crore and involving firms such as HPCL-Mittal, Petronet, L&T, Ansal and PFC.

The idea is to ensure that these projects take off smoothly, a finance ministry official said, adding that Finance Minister P Chidambaram is likely to hold a review meeting on the status of the stalled projects by the end of this month. “Banks have sanctioned around Rs 12,000 crore for these projects. We are not expecting them to work out the fine print, but since they have appraised these projects they can point out any possible irritants,” said the official, who did not wish to be named.

The ministry is also looking at an effective coordination mechanism with the special cell in the Cabinet Secretariat to push big-ticket investments. The cell is headed by additional secretary Anil Swarup, who has started meeting chief secretaries of state governments on the issue. “They (special cell) have set up a portal through which they have collated some more information directly from the companies. We want all parties involved, including banks, to be aware of the latest status of these projects,” the official said.

Read more: The Economic Times

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