REAL ESTATE FINANCING- OPTIONS & ISSUES - PowerPoint Presentation

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REAL ESTATE FINANCING- OPTIONS & ISSUES

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INTRODUCTION : REAL ESTATE IN INDIA The asset classes in real estate sector can be divided into : Residential

Commercial/IT offices Retail

Hospitality segments Industrial Parks/SEZs

Warehousing

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SECTOR DYNAMICS

Driving

Force

Residential – changing demographics, urbanization, ease of finance

Office Space –

IT, Telecom

and

BPO;

Retail – new retail formats and entry of global brands; Hotels – domestic business travel and domestic tourism; and Warehouses – organized retailing and requirement of logistic services. Current annual Indian real estate market size is estimated @ US$ 40 bn Residential 70% Commercial segment 25% Organized retail, industrial warehouse and hospitality combined at 5% To promote institutional funding in the sector FDI norms were relaxed in 2005 ( Red Tape to Red Carpet) During 2005-10, industry recorded growth of 30% CAGR and is concentrated in the top 7 metros. 7 cities account for approximately 70-75% of Grade A office space in the country, with a leased space of around 279 MM sq.ft. ( as against 373 mm sq.ft in Manhattan , London is 210 mm sq.ft.) Indian real estate market is expected to grow at a CAGR of 20%, with an estimated market size of US$ 180 bn by 2020

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FINANCING OPTIONSBANK CREDITS:

-CC/OD/ PROJECT LOAN - FACTORING - LC/BG(Non fund Based) - LRD

- LAP EXTERNAL COMMERCIAL BORROWING (ECB)

PRIVATE EQUITY- DOMESTIC FUNDS

FOREIGN

DIRECT INVESTMENTS- CCD/CCP/EQUITYFCCB/ADR/GDR/QIP(For Listed Co.’s)

Listing in International markets such as AIM

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BANK CREDIT - GENERAL Lending by Banks continues to be the biggest sources of financing for real estate companies in India. They also

finance the real estate sector by providing housing loans to individuals. Banks provide indirect finance to real estate sector by giving loans to housing finance institutions.

Some of the prominent Indian Banks lending to real estate are :

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Source: ET dated 29

th

nov, 2012

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BANK CREDIT – CC/OD/ PROJECT LOAN Purpose: To meet working capital requirements. Amount of facility: Based upon the Bank's assessment of the working capital requirement (WIP & book debts)

Security: Charge on current assetsCollateral(s) on case to case basis

.Interest Rates: 12% -16%

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BANK CREDIT – FACTORING Factoring is a service that covers the financing & collection of account receivables of series of trade transactions between a seller & a buyer in the domestic market as well as international market.Advantages: It is among the quickest

way to get advance cash.  Cost effective with the cut in invoice processing and collection activities. Getting cash with factoring helps in eliminating the risks of bad debts.

It helps the company in concentrating over more projects. It gives an opportunity to offer credit to customers. It helps in building

credit history

and no long-term obligation.

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BANK CREDIT – LC/BG Letter of credit(LC) is a written undertaking by a bank( issuing bank) given to the seller (beneficiary) at the request and in accordance with the instructions of buyer (applicant) to effect payment of a stated amount within a prescribed time limit and against stipulated documents provided all the terms and conditions of the credit are complied with.

Bank guarantee is a type of guarantee in which a bank promises to repay the liabilities of a debtor in the event that the debtor is unable to. The contract of guarantee has three parties Principal Debtor, Principal Creditor, Guarantor i.e. Bank

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BANK CREDIT - LEASE RENTAL DISCOUNTING Lease Rental Discounting (LRD) is a type of Term Loan offered against rental receipts derived from lease contracts with corporate tenants. Quantum:

Based on the discounted value of the rentals 50% to 75% of underlying property value.Maximum Tenure: 9-15 years ( Linked with lease period, lock in period, quality of tenant etc.)

Repayment Mode: Generally Rentals are payable by the tenant directly to an escrow account with lending bank.

Security:

The underlying leased property will be taken as prime security.

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EURO CORPORATE SERVICESLoan against property is similar to other loans like home loan, Equipment Loan etc.Quantum of Loan: Depends on type of property & income of the borrowerTenure:

Flexible for 1 – 15 yearsInterest Rates: 11%-14%Security:

Charge on Property and LTVs are generally at 65- 70% of PMV

BANK CREDIT -LOAN AGAINST PROPERTY

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EXTERNAL COMMERCIAL BORROWINGS ( ECB)ECB allow corporate to access the foreign currency loans through commercial bank

in the form of loans,suppliers’ credit, fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares availed of from non-resident lenders. Since January 2009, ECB route has been opened for the development of

Hotel projects, integrated townships & Industrial Parks. For Industrial Parks ECB is allowed under automatic route while for SEZ & Integrated township development ECBs is allowed under approval route.

Real

Estate companies like Jai Prakash

Associates,

Unitech, HDIL and AMR Construction, etc. have used ECB to raise funds.

ECB - GUIDELINES

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Maximum Loan Amount:

Corporate engaged in hotel, hospital & software sectors: Up to USD 200 MillionReal sector ( Industrial & Infra): up to USD 750 Million 11Slide12

Tenure:Up to USD 20 Million: Min Avg maturity of 3 yearsAbove USD 20 Million: Min Avg maturity of 5 yearsEURO CORPORATE SERVICES

ECB - GUIDELINES

Cost:

Average maturity period

All-in-cost Ceilings over 6 month LIBOR

Three years and up to five years

350 basis points

More than five years

500 basis points

Prepayment:

Prepayment of ECB up to USD 500 million may be allowed by AD Banks without prior approval of RBI subject to compliance with minimum average maturity period as applicable to the loan.12Slide13

PRIVATE EQUITY- DOMESTIC FUNDSPrivate Equity players have been very active in the real estate sector especially in housing from the past few years (2005 onwards).

Besides Equity, structured debt-like instruments are used in light of volatility this industry faces.

Major Domestic Players in India:ICICI VenturesIDFCHDFC IL &FS

Kotak Private Equity

Urban Infra RE Fund (Jay Corp)

Indiareit (Piramal Group)

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FOREIGN DIRECT INVESTMENTSFDI are investments made in home country by foreign investors. Total FDI in India’s housing and real estate sector till date is about 19 bn USDBesides the Foreign Funds there are certain Indian Fund houses which have raised foreign capital and are sponsoring FDI funds- prominent names are Tata, Piramals, Sun Group, ILFS.

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Major Players

Sun Apollo

Wells Fargo

Morgan Stanley Real Estate

Goldman Sachs Real Estate

GIC, Singapore

Blackstone

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FDI IN REAL ESTATE ParticularsNRIOther non-residents

Direct investment in immovable property

Possible –Purchase of agricultural land / plantation / farm house excluded

Not possible –

However foreign companies are allowed to acquire immoveable property with approvals, for branch office

&

places of business.

Investment in SPVs - Investee entity

Partnership firms / sole

proprietorship

(on non- repatriation basis)CompaniesOnly companiesNature of real estate activitySPV cannot engage in agriculture / plantation / real estate business (dealing in land / immovable property)Housing, townships, infrastructure Hotels and tourism Industrial parks SEZsEURO CORPORATE SERVICES15Slide16

FDI -REGULATIONSParticularsRegulationsMinimum area of development

Serviced housing plots –10 hectares(1 lakh Sq mtr)Construction – development projects - 50,000 sq meters

Combination projects – either of above two conditions to be metInvestment limits

WOS – min capitalization of US$ 10 million

JV with Indian partners – US$ 5 million

Investment within six months of business commencement

Lock-in restrictions

Original investment locked-in for 3 years from the date is in brought-in( However, the FIPB

has clarified that the definition of original investment is the entire investment)

Project development

50% of the project to be developed in 5 years from the date of obtaining statutory approvals. (under-developed plots cannot be sold)EURO CORPORATE SERVICES16Slide17

FDI IN OTHER REAL ESTATE ACTIVITIESParticularsRouteHotels, tourism and hospitals

100 percent permitted under automatic routeHotels include restaurants, beach resorts and other tourist complexes providing

accommodation and/or catering and food facilities to touristsIndustrial parks

100 percent permitted as per the Industrial Parks Scheme, 2002

SEZs

100 percent permitted as per the SEZ policy

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PRICING GUIDELINESSubscription of shares by Non-ResidentIssue price shall not be less than:

In case of listed companies- Price worked out as per SEBI guidelines.

In other cases- Fair valuation of shares worked out and certified by a Chartered Accountant.

Transfer

of shares

By Non-Resident to Resident: Sale price shall not be more than

Listed company

Transaction through a stock exchange - prevailing market price

Unlisted company

A price which is lower of:

Independent valuation of share by statutory auditors of the companyIndependent valuation of share by a Chartered Accountant or Merchant Banker ( the mechanism prescribed for the valuation is DCF)By Resident to Non-Resident – Pricing shall be same as in case of subscription of shares by non-resident Non-Resident to Non-Resident : No price restrictions EURO CORPORATE SERVICES18Slide19

KEY ISSUESIssueViews/ challenges

Minimum capitalisation norms

Would acquisition of existing shares from promoters be

considered towards the minimum capitalization norms

Lock-in requirements

Meaning of ‘original investment’ for the purposes of lock-in requirements:

Would the entire investment be locked-in for 3 years

Would investment up to the

min.

capitalization be locked inWould lock-in apply only for the 1st tranche of investmentsFIPB has clarified that the definition of ‘original investment’ is the entire investment and each tranche which is locked in from the date it is brought-in. However, FIPB can grant a specific approval on case to case basis.Time-limit of six months from commencement of businessDoes it imply that investments may only be made in newly incorporated companies- Not necessaryImpact on enterprise-level investments- NoDo all non-FDI-compliant projects need to be hived off - YesEURO CORPORATE SERVICES19Slide20

EURO CORPORATE SERVICESExecution of projects through step down subsidiaries

Approval required for investment in holding companiesApproval required to form step down subsidiaries for project execution

Project execution through partnership firms

Is this permitted? Not permitted

Does it require approval- Yes

Hive-off / de-merger of projects subsequent to investment

Does it imply that minimum area requirements are not complied with – Need to comply

KEY ISSUES

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KEY CHALLENGESIssueKey challenges

Investmen

t in com

p

a

nies hold

ing agric

u

l

tu

ral landFDI policy prohibits investment in agricultural land / plantations / farm houses – FDI may have to come in only after conversion of agricultural land.(But ok if in development zone of master plan)Repayment of Investment to

Non-resi

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–

Quantum

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rictions applyChoice of overseas jurisdiction for routing investments A number of treaties believed to be under review Will Mauritius, Cyprus treaties be renegotiated ????Return on InvestmentsPreference shares – coupon rate benchmarked to SBI Base rateDebentures – Lack of clarity on maximum coupon rate

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FOREIGN INVESTMENTS THROUGH PREF SHARES & DEBENTURESParticularsBefore amendment

After amendmentForeign investment through preference shares

Foreign investment through debentures

Preference shares that were redeemable and / or optionally/ partially convertible came

under the FDI regime

Debentures that were not convertible or partially / optionally convertible did not come under ECB regime

Any preference shares issued after 1st May,

2007 to be part of equity only if they are compulsorily convertible. In all other cases, they will be considered as debt and will have to comply with the ECB guidelines.

Also, existing investments in such shares may continue till their current maturity.

Only fully and mandatorily convertible debentures, within a specified period of time, would be reckoned as FDI; all other debentures would be regarded as ECB.EURO CORPORATE SERVICES22Slide23

FCCB/ADR/GDR/QIP(For Listed Co.’s)Qualified Institutional Placement (QIP) route offers a cost-efficient way of raising funds from the domestic institutional investors, thus offering an attractive alternative when overseas borrowings dry up. This mode of fund raising has lesser procedural requirements. Real estate companies that have raised money through the QIP route includes

Unitech, Parsvnath Developers, HDIL, DLF etc.

Foreign Currency Commercial Bond (FCCB) is a mix between a debt and equity instrument issued in a currency different than the issuer’s domestic currency. It acts like a bond by providing regular coupon and principal payments but at the same time gives bondholders the option to convert the bond into stock.

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Real Estate Mutual Funds ( REMF) EURO CORPORATE SERVICES

Real Estate Mutual Funds – Introduction

In simple terms, Real Estate mutual funds are close ended mutual funds with a lock-in period of 3 years. These mutual funds will invest in real estate properties and being the owners of these properties, they will let out these properties on rent. The rent so earned will be distributed to investors as dividend. When the mutual fund attains maturity, the company can sell its holdings and return your investments.

SEBI has kept the scope of the

REMF

wide open, as the guidelines allow REMF to invest in the following sectors:• Directly in real estate properties within India

• Mortgage (housing lease) backed securities• Equity shares of companies which deal in properties• Other securities like debt instruments

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