Post by bhumika on Aug 23, 2007 18:29:25 GMT 5.5
This is only a temporary phenomenon
Rajeev Talwar
Group Executive Director, DLF
Of late, there has been a lot of talk on the issue of a major fund crunch that the real estate sector is facing. Perhaps, what has fuelled this notion further are some recent government directives such as the curb on ECBs along with the earlier hikes in interest rates.
However, in my opinion, it will not be fair to generalise this notion. It should not have a huge impact on big developers like DLF, who enjoy the necessary credibility in the market.
What may happen in the coming times is that the sector will see a lot of consolidation. In the last half a decade or so, many small-sized cash rich individuals and firms have floated boutique real estate firms. They have amassed significant landbanks in various cities.
While they were doing so, the regulations were not all that strict. One could easily get away with practices such as “pre-launch”. Bank loans to buy a home were not that difficult to get and interest rates were reasonable. Fund crunch was not a question at all.
Clearly, things are different now. These small firms, faced with difficulties to invest in development, are approaching bigger companies to take on the mantle of development. Among the mid-sized developers, many firms are now seeking to forge joint ventures with foreign companies and bigger developers.
In the last couple of years, private equity funding has also evolved as a great alternative for funding projects. PEs are clearly bullish on the sector and are participating vigourously in the real estate sector. They perceive it as a sunrise sector for the next decade. With debt getting increasingly difficult, even family-owned companies are now open to diluting equity to these funds.
All said and done, the real estate sector still has a lot of scope in it. There are major opportunities waiting to be unfolded. As per government estimates, in the urban housing sector itself, there is a shortage of 25 million units.
All the ongoing developments will not lead to a supply of more than 10% of the demand. The present fund crunch is only a temporary phenomenon and as the sector gets consolidated, the crisis will definitely be a matter of the past.
Developers need to deliberate on growth
Ramesh Jogani
CEO & MD, Indiareit Fund Advisors
A recent report on private equity investments into India indicated real estate and infrastructure were becoming increasingly attractive sectors for global investors — attracting deals worth $2.2 billion in the first half of year 2007. Despite that, the real estate companies are facing a funding crunch.
Real estate received a big boost with the evolving economic growth paradigms of India. Nuclearisation of families, increasing urbanisation, higher disposable incomes and better access to financial resources proved to be a demand catalyst.
This propelled aggressive ambitions amongst the developers, who went on to rapidly ramp up operations, acquire land and increase their geographical presence. But as property prices rose to astronomical levels and fears of hazardous speculation increased, regulators cracked down with tighter monetary and fiscal policies.
These measures acted as a ‘speed-breakers’ to the industry. However, its fundamentals and demand base remains firm. And developers, despite liquidity crunch, did not constrain their ambitions. They sought out private equity funds to acquire land at higher prices and also to support their expansion plans.
However, it is here that perceptions went awry. While the developers thought that money would be available easily, they were unaccustomed to the prudent investment norms adopted by the fund houses.
Indeed, a Deutsche Bank research (2006) found that institutional investors find only 27% of the total real estate companies in India to be within the ‘investment grade’ as compared to almost 35% in China and 65% in Japan. Hence, several projects and developers are unable to find the right investment partners.
We at Indiareit believe that there is sufficient funds in the market, yet developers invariably face funding crunch due to a clear mismatch in expectations on delivery and returns between fund houses and developers. Developers need to tread cautiously now and deliberate on their growth plans, as the industry is set to face a shake out.
Transparency, philosophy of mutual benefit and striving to sustain world-class quality in project implementation are crucial to achieve timely financial closures for their projects and grow ahead.
Rajeev Talwar
Group Executive Director, DLF
Of late, there has been a lot of talk on the issue of a major fund crunch that the real estate sector is facing. Perhaps, what has fuelled this notion further are some recent government directives such as the curb on ECBs along with the earlier hikes in interest rates.
However, in my opinion, it will not be fair to generalise this notion. It should not have a huge impact on big developers like DLF, who enjoy the necessary credibility in the market.
What may happen in the coming times is that the sector will see a lot of consolidation. In the last half a decade or so, many small-sized cash rich individuals and firms have floated boutique real estate firms. They have amassed significant landbanks in various cities.
While they were doing so, the regulations were not all that strict. One could easily get away with practices such as “pre-launch”. Bank loans to buy a home were not that difficult to get and interest rates were reasonable. Fund crunch was not a question at all.
Clearly, things are different now. These small firms, faced with difficulties to invest in development, are approaching bigger companies to take on the mantle of development. Among the mid-sized developers, many firms are now seeking to forge joint ventures with foreign companies and bigger developers.
In the last couple of years, private equity funding has also evolved as a great alternative for funding projects. PEs are clearly bullish on the sector and are participating vigourously in the real estate sector. They perceive it as a sunrise sector for the next decade. With debt getting increasingly difficult, even family-owned companies are now open to diluting equity to these funds.
All said and done, the real estate sector still has a lot of scope in it. There are major opportunities waiting to be unfolded. As per government estimates, in the urban housing sector itself, there is a shortage of 25 million units.
All the ongoing developments will not lead to a supply of more than 10% of the demand. The present fund crunch is only a temporary phenomenon and as the sector gets consolidated, the crisis will definitely be a matter of the past.
Developers need to deliberate on growth
Ramesh Jogani
CEO & MD, Indiareit Fund Advisors
A recent report on private equity investments into India indicated real estate and infrastructure were becoming increasingly attractive sectors for global investors — attracting deals worth $2.2 billion in the first half of year 2007. Despite that, the real estate companies are facing a funding crunch.
Real estate received a big boost with the evolving economic growth paradigms of India. Nuclearisation of families, increasing urbanisation, higher disposable incomes and better access to financial resources proved to be a demand catalyst.
This propelled aggressive ambitions amongst the developers, who went on to rapidly ramp up operations, acquire land and increase their geographical presence. But as property prices rose to astronomical levels and fears of hazardous speculation increased, regulators cracked down with tighter monetary and fiscal policies.
These measures acted as a ‘speed-breakers’ to the industry. However, its fundamentals and demand base remains firm. And developers, despite liquidity crunch, did not constrain their ambitions. They sought out private equity funds to acquire land at higher prices and also to support their expansion plans.
However, it is here that perceptions went awry. While the developers thought that money would be available easily, they were unaccustomed to the prudent investment norms adopted by the fund houses.
Indeed, a Deutsche Bank research (2006) found that institutional investors find only 27% of the total real estate companies in India to be within the ‘investment grade’ as compared to almost 35% in China and 65% in Japan. Hence, several projects and developers are unable to find the right investment partners.
We at Indiareit believe that there is sufficient funds in the market, yet developers invariably face funding crunch due to a clear mismatch in expectations on delivery and returns between fund houses and developers. Developers need to tread cautiously now and deliberate on their growth plans, as the industry is set to face a shake out.
Transparency, philosophy of mutual benefit and striving to sustain world-class quality in project implementation are crucial to achieve timely financial closures for their projects and grow ahead.