Commercial Real Estate: Will Capital Raising Become A Challenge?
With the pandemic hitting almost every sector hard, the commercial real estate -- especially the office sector -- is bearing the brunt most abominably. However, the real estate affordable housing sector saw a comeback last year during the month of September, the work from home situation has halted the office resumption sine die.
The commercial real estate sector in the near and short term has some risks owing to work from home or work near home situation. Also, the new concepts that are emerging in the work style have questioned the need for office set-up. But if India has to grow ahead in the real estate sector, the growth in the office sector becomes inevitable. The long-term situation looks intact though, believe the experts.
Impact On Fundraising
When it comes to challenges in raising capital, Amit Diwan, MD & Country Head, Hines India thinks that there are no new challenges that have evolved since the pandemic. He says, “The capital is always available. The requirements of the lenders have been exactly the same.” He further opines that the lenders need a logical project and business plan, a high-quality operator that they can trust, and then you need confidence for the execution.
“You have got all those things in place, money is always available,” he adds.
Diwan says, “From time to time, there will be differences and I think the challenges are fewer today because the lenders are flushed with liquidity at the lowest ever interest rates I have ever seen. There is capital ready and available.”
However, Diwan also believes that the office sector is in the middle of a shakeup and this will continue for an extended period of time. “The strength of the economy and the growth will take over. One thing that will happen in two or three years is the unquestionable flight quality. The occupier, who is ultimately driving the value in the office sector, is going to choose better partners, better landlords, and better projects. As a result, the developers who are manufacturing or owning better projects will get funding more easily,” he comments.
“But in the interim, the next couple of years will see uncertainty. Liquidity will be available more for lower-risk situations. That lower risk is the perception of the lenders themselves,” Diwan speaks.
Overcoming The Challenges While Raising Capital
Gaurav Karnik, EY India Real Estate National Leader and Tax Partner share his views on how real estate developers can avoid the challenges while raising the capital He shares, “The track record of the developer is extremely important. The number of investors and lenders have either put money as equity or debt or banks have lent or a number of them have either burned their fingers quite badly.”
The expert believes that the lenders while taking up a project, first look at the track record of the developers. How well he has executed the projects. When you are bringing projects to a particular lender, the point is how they are going to execute it and make sure about the cash flows happening, the company’s marketing strategy, how good are your completion strategies in the past and going forward. Things like that show them the path to cash, he thinks.
“In the past, people have given money based on parent or promoter guarantees. But it is not that it has worked throughout. We have so many cases that landed with IBC because of the ways that money circulated amongst projects, in buying new lands, or not completing projects. This created a sense of the whole discomfort,” Karnik adds.
“When lenders now look at the projects, they have learned a lot. They want to be very clear that if they land up in the project, the cash flows must be pretty visible along with a faster turnaround. The real estate office developers need to get that house in order,” he concludes.
*The comments of the speakers have been taken during an industry forum
