Are investors a market necessity?


While it may be a challenge to rely on investors for funding, developers may have no choice in the present market conditions where there is a paucity of cheap funds

In a cash-starved business like real estate, almost all the developers have their own set of lenders, investors, quasi-equity partners and even informal crowdfunding mechanisms. The extent to which these intermediaries solve the sector’s funding woes, remains debatable. Concerns have also been raised over whether these intermediaries get a free run, to make money and be a catalyst to unaffordable housing stocks across the Indian cities.

 

Pros and cons

While developers may not admit to this market reality, some of them agree that it is a financial compulsion, to carry on business with investors as anchors for their projects. Although it may be quite challenging to live with investors as quasi-equity partners, there is no denying that developers, in the present eco-system, need investors. Industry experts maintain that one also needs to look at the root causes that facilitate investors’ entry into the business and their subsequent success.

Pranay Vakil, chairman of Praron Consultancy, feels that understanding why investors have thrived in this sector, will help us in the future. Lenders are generally risk-averse and prefer a safe return on investment (ROI) of 18-25%. Consequently, the investors come into the picture and they are more suitable to the developers. Investors are exposed to the risk of fluctuating prices, but they are different from end-users, points out Vakil.

See also: Home buyers’ wish-list for Budget 2017: Remove investors, encourage end-users

“The RBI does not allow the financing of land. Moreover, all the developers, except of a few listed companies, are under-capitalised. An investor does not mind getting into a project at a pre-booking phase, which others won’t do. Even the lenders would ask whether the plan has been approved or not. So, an investor is nothing but quasi-equity,” says Vakil.

Devang Trivedi, managing director of the Progressive Group, defends the presence of investors. When developers are unable to get funds at reasonable rates, they turn to these investors and it is a win-win deal, as the investor also gets higher returns and tangible assets as collaterals. “The investor also knows that he can exit at his convenience. Except for a few, well-funded developers, 90% of the developers have their own set of investors. It is happening across markets now. Nowadays, developers are even making deals for investors to change from one project to another. Additionally, black money can be easily absorbed in this business,” Trivedi explains.

 

ROI

Girish Menghani, vice-president (marketing), Omkar Realtors & Developers, asserts that investors have also benefitted of late, as the flow of communication with the developers has improved. There are professional agencies to guide them on where to park the money. “So, while the investor’s risk has come down, he is getting higher returns compared to any other asset class or investment instrument,” adds Menghani.

Moreover, investors are attracted to real estate, as the sector has given the highest returns in the last 20 years. This has given rise to two kinds of investors. The first type, includes rich individuals who want to park their money and the other includes individuals who buy a house and also invest in more than one project, for the highest ROI. In any case, it is a mutually-beneficial relationship, with developers managing to raise funds from investors, who act as quasi-equity partners of the developers and are often project riders in the real estate market.

(The writer is CEO, Track2Realty)

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