Indian real estate funding - Real Estate Inc. India needs to think out of the box!

In the year 2007, the last concern on the mind of a real estate developer in India was funds. That was one commodity that was in abundance. Then came the global meltdown of 2008. The RBI extended its most generous helping hand in allowing developers to restructure their debts. I clearly remember the warmth extended by a consortium of bankers I was dealing with those days for my employer. Some travelling and a truck load of paperwork later, the debt restructuring was approved by all the eight banks which had jointly come together to fund that mixed use project.

Lately, residential property prices in India have gone up to uncomfortable levels again, forcing the genuine end user to put off home buying for a while. Add to that the fact that the RBI sledgehammer to bring down inflation consists of ever increasing lending rates. We hear there is some more in the pipeline! And debt restructuring is not a cake walk anymore.

With sales slowing, input costs rising (here is another article on the cost rise woes of the Indian developer), Private Equity from abroad drying up (The PE players have expressed concern about difficulty in exits and governance issues in investee companies. Also, the interest of overseas Limited Partners in Indian real estate has shown decline in the recent months. The current PE activity in India has largely been by domestic investors or by way of mezzanine capital, organised as Foreign Direct Investments. - DNA), what does the developer do to meet his funding needs and deliver a quality project on time? Thinking out of the box along these lines could be a good place to start.

1) REIT: The REIT(Real Estate Investment Trust) regulation, which has been in draft form for more than two years, can be brought in now. Across global markets, REIT structures have helped attract institutional investors looking at ready yields, as well as retail investors. It’s something that could be brought in India now to help boost real estate sales.

2) Price Correction: Looking within is a great way to overcome hurdles, is an age old saying. Price corrections by the developers could provide the much needed stimulus to weak residential property sales. There are a lot of buyers out there who are sitting on the fence. Price hikes and increasing home loan rates are not really helping them make up their minds about home ownership. A price correction would ensure most of these blokes sign out their booking cheques.

3) Economic Reforms: Regulators and governing bodies can also help the sector by introducing reforms in the form of strengthening the secondary market for stabilised assets.

4) Transparency and governance to improve investor confidence: Also, the governance standards for the entire real estate industry has to improve to instate greater investor confidence. How about a law restricting developers from accessing pre-sales revenue for use in other projects until completion of that current project. Currently, the developers can use funds from pre-sale of a certain project to invest in another new project.

There cannot be one magic solution to the problem at hand for India real estate inc. However, we thing a mix of governance, transparent policies and pricing discipline would go a long way to strengthen end user and investor confidence. The two key funding channels for our friendly neighbourhood real estate builder!