Investments in and out of the real estate sector Opportunities | Avenues | Portent challenges while making such deals

Ram Yadav – CEO, Edelweiss Real Estate Advisory Practice

In the past year, the Indian economy witnessed immense depth, flexibility and confidence.In the past year, the Indian economy witnessed immense depth, flexibility and confidence. The real estate industry itself went through some major reforms to cleanse the system clubbed with multiple regulatory changes such as Demonetisation, GST, RERA and the amendment to the Benami Transactions (Prohibition) Act 1988. With the advent of RERA, transparency has got infused into the system which brought the trust & customer back in the market. Furthermore, though the market faced a short term slow down due to unavailability of funds but in the longer run it has paved the way for reduced inflation in price, better home ownership appetite with increased transparency and capital inflows in the realty sector. Subsequently with the GST coming in there was a positive impact that was seen in the industry as the taxation and compliance got simplified. These reforms in the medium to long run are poised to bring about consolidation, transparency and financial discipline amongst all participants in the industry.

Over the years, the real estate industry in India has been highly fragmented and localized business. With the consolidation happening in the industry, it will be driven by the following factors: increased upfront capital requirement, shift of consumer preference to branded players and access to formal lending. As an aftermath of demonetization the developers are now compelled to have cleaner balance sheets so that they can avail funding now from legitimate sources. This is an opportunity for the NBFC segment to provide funding to these developers at an optimal costs and help them construct, deliver & distribute. Hence, funding from NBFCs is gradually becoming the primary source of capital for developers and will only continue to grow at fast pace as the opportunities in real estate are plenty. Therefore, being bullish & aggressive to increase exposure into real estate and further expand the scope of investments beyond residential projects (even leaving behind banks and private equity (PE) funds) would be a decisive call.  Though anticipated, these structural changes have caused commercial banks and NBFCs to be more informed in lending to this sector which has further cash trapped the developers. However, developers today largely rely on banks/ NBFCs as well as customer receipts for their capital needs.

I truly believe in what Sun-Tzu said, that ‘In the midst of chaos, there is also opportunity.’ NBFCs like ours which specializes in Real Estate lending have found a sweet spot as we are willing to underwrite calculated risks. By financing the last-mile projects and refinancing in advanced projects, we intend to keep the risks significantly low. Furthermore, risks are getting mitigated as financers are also transacting with larger, established developers and lending to both greenfield/ brownfield projects with approvals. With a mind-set focused on rigorous underwriting to avoid any un-systemic risks and/ or policy ambiguity to constant monitoring and support to the developer partner to taking swift actions against defaulters, we are marching ahead and building our portfolio. This construct we believe will help separate wheat from the chaff

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