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As bank credit plunges, private equity emerges as top funding route for real estate sector

Bank credit to the real estate sector has shrunk by more than half in the past five years on the back of rising non-performing assets (NPAs), higher risk provisioning and mounting losses of companies. (Source: IE)

Bank credit to the real estate sector has shrunk by more than half in the past five years on the back of rising non-performing assets (NPAs), higher risk provisioning and mounting losses of companies, a report released by Knight Frank India on Tuesday said. The sector raised `35,100 crore in 2016, mainly through private equity (PE) players, up from `24,700 crore back in 2011, an increase of 42%. Bank funding has shrunk drastically in the last few years, from 57% in 2011 to less than 24% in 2016. In contrast, around three-fourths of the real estate sector’s funding requirement was being met by PE players in the past couple of years, as against one-fourth in 2011. As the sector matures and the Real Estate (Regulation and Development) Act, 2016 comes into existence, the role of PE capital will play an even greater role, said Rajeev Bairathi, executive director and head of capital markets at Knight Frank, India.

FE had last month reported that PE players and non-banking financial companies (NBFCs) have emerged as the new financiers for developers, as banks have been slowing their lending to the sector, especially on the back of poor housing sales data. On last count, sales declined by 10% on a year-on-year basis in the month ended December 2016.
A major reason for the shift towards PE, mainly structured debt, is because deals are being crafted to offer moratoriums. At times, the holiday is even up to two years before repayment obligations kick in, something which banks do not extend.

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The logic is to align repayment to actual cash flows expected from the projects. Provisions under RERA now do not allow companies to sell apartments at the launch stage, scuttling the age-old practice of monetising a parcel of land at the pre-sales stage itself. “Will not buy apartments that are just a hole in the wall,” said Amit Pachisia, chief credit officer at Altico Capital. Hence, developers need the leeway to construct since sales velocity improves when there is visibility of execution, Pachisia added.