An Eternal Thirst Of Capital In Real Estate: PHDCCI

A report by CBRE has said that the Indian real estate sector is expected to touch the USD 1 trillion mark by 2030. The real estate sector is the second-highest employment generator, after the agriculture sector. It contributes nearly 5 to 6 per cent to the gross domestic product (GDP) and going forward the sector is likely to contribute 15 to 18 per cent to the Indian GDP by 2030. 

The focus of the government has been on empowering every stakeholder involved in the process, especially developers who are capable of spurring the development of quality products and infusing the much-needed stability in the market.

However, the dearth of capital imposes certain limitations on the sector. The capital-intensive business troubles the developers and compels them to procure funds at high rates.

“Real estate has a very tricky access to capital in the absence of structured availability of debt. Such a roadblock results in the failure of projects due to cash flow drying out. The scarcity of funds has a heinous effect on the market downturn. Banks and Non-banking financial companies (NBFCs) do not lend the developers for the acquisition of lands. Current capital access from AIFs and FDI offers a higher rate, therefore an alternative with lower cost should be available,” said Gaurav Malik, Chief Financial Officer, Experion.

While speaking at PHDCCI's Real Estate Summit 2024, Gaurav further added that real estate is a business of trust. The customer’s experience and timely delivery are beyond the ‘profit and loss’ (P&L) statement

The investment activity in 2023 concluded with a marginal decline of approximately 5 per cent year-on-year (YoY), reaching a total of USD 7.4 billion, compared to USD 7.8 billion in 2022. This dip can be attributed to delays in decision-making and a cautious sentiment surrounding capital deployment, as stated in CBRE research. 

Private Equity Play

“Capital demand in the real estate sector is eternal, notably billions of dollars are locked up in several stuck real estate projects. A judicial approach intervention can help in unlocking this huge fund. Besides, private equity in real estate can also be a feasible instrument. When the first phase of PE was deployed in 2006, the market was not mature enough from both ends. Albeit, I have a strong belief that private equity capital will retreat in the market,” said Arpito Mukherjee, Managing Director, Apollo Global Management.  

The real estate sector has witnessed an influx of nearly USD 33 billion worth of equity capital since 2019, with average annual inflows of over USD 6.7 billion. 

Commenting on the optimism of private equity, Nisheeth Saran, Managing Director at Asia, Pragati Strategic Investment Fund shared, “There is indeed a huge funding gap in the real estate sector since Banks and NBFCs consider real estate as a riskier asset. Private equity is inevitable, but not in the near term. As of now, debt looks like a safer play.”

Green Financing

With the growing inclination towards sustainability and the real estate efforts to compensate for the loss of greenery, more and more developers are integrating the proportion of green cover in their projects. However, the incentive for such an approach while financing the projects is still debatable. 

“Banks have become proactive in evaluating these steps while financing a project. However, there are no explicit laws which can deprive funding in case of non-compliance,” said Manik Malik, Chief Financial Officer, BPTP. 

The question revolves around survival, the basic need for funding should be solved in totality. The survival of developers depends upon the project completion instead of integrating greenery. Greenery is a discretionary and additional cost for the developers. Moreover, there is no leverage available in funding in the criteria of green financing, said Saran. 

Conversely, Mukherjee shared that, particularly in commercial real estate, there is an incentive when you rent for global tenants like Google, Microsoft etc. The preferential incentive from such big tech players increases the rental yield.