(Source:MINT )

R ealtors are turning to private equity (PE) investors and non-banking financial companies (NBFCs) for money
as banks tighten funding for real estate firms in the wake of the recent bribes-for-loans scam.
At least three real estate companies are currently engaged in talks with PE investors to support their ongoing
projects as banks turned riskaverse after transactions with realtors came under the scanner of regulators and investigating
agencies, according to investment bankers.
Typically, PE funds invest $50-150 million (`225-675 crore) in realty firms for threefive years and make returns of
around 25-30% on exit. “It (the scarcity of loans) has just started. The real shortage will be felt in the next 30-45
days. Given that banks are now hesitant to give new loans, the issue is likely to persist at least in the next two quarters. Real
estate companies are now looking at private equity andnon-banking firms for funds,” said Arun Kedia, director of marketing
at Mumbai-based Garnet Construction Ltd.
“Definitely there is going to be much more appetite for Pes to look at more projects (in the\ real estate sector). From our
perspective, I think that the pace and quantum of funding(by PEs) will take a leap now (given the shortage of bank funds),”
Ashish Joshi, managing partner (real estate) at Milestone Capital Advisors Ltd, said.
Milestone has around $750 million worth of assets under management with 90% investment in real estate.
Banks’ exposure to the real estate sector has grown manifold in the past few years. Overall, the banking industry lent 17% of
their total advances to the real estate sector in the fiscal ended March.
For the new private sector lenders, the comparable figure is 26%, according to RBI data. In the first 11 months of calendar
year 2010, PE firms invested $1.24 billion in real estatefirms, up from $749 million that they had done in
2009, according to data from Venture Intelligence, a firm that tracks venture capital and PE deals.
Typically, real estate companies raise equity capital through qualified institutional placements (QIPs) and private
placements, but the QIP route is not a viable option in the prevailing market conditions as the valuations of realty firms have
fallen sharply in the recent past, said Vinay Menon, managing director of equity capital and derivative markets at JPMorgan
India.
“Valuations have fallen sharply for some of the companies. Though valuations are attractive for an investor, it may not be so
for firms as they have to dilute shares at a considerably lower price,” Menon said. The PE firms will also get the advantage
of relatively lower valuations. Yet, the realtors are not averse to negotiating with them as the time taken to raise money
through the PE route is shorter.
Since 24 November, when the corporate loan scam was unearthed by CBI, the Bombay Stock Exchange’s real estate index
has fallen by 2.97% to 2,951.25.
Shares of leading realty firms DB Realty Ltd and Unitech Ltd have fallen by 8.11% and 4.47%, respectively,
while Ackruti City Ltd dropped 29%. Real estate companies are also looking at the lease rent discounting route (LRD) to
access funding. Under LRD, developers can avail of loans against their rental receivables. Demand is also on the rise from
realtors for funding from NBFCs. Banks lend at 12-15% to real estate firms while the
cost is much higher, often 15-20%, for raising funds from non-banking firms. NBFCs are selling non-convertible
debentures of real estate firms through their wealth management arms yielding 14-18%. These securities carry a maturity of
two-three years and do not provide any guaranteed return to the investor if the market turns adverse, according to Om Ahuja,
head of wealth management at Emkay Global Financial Services Ltd. “There are many NBFCs in the market who
downsell these papers issued by real estate firms to HNI (high networth individual) customers. HNIs are buying these papers
out of greed, driving the whole demand, but if something goes
wrong in the market, these investors will have to suffer,” Ahuja said.
According to a senior official with a large state-run bank,\ lenders have stopped accepting proposals for fresh loans to
companies that figured in CBI’s list. Until recently, builders used to avail of bank loans by showing inflated project costs
and use the money for buying land. “Banks have become very cautious. The real estate promoters can go to private equity
players. Extra precautions will be incorporated now (while considering loan proposals),” a senior official of state-run\ Union
Bank of India, said. He did not want to be named.
Shraddha Nair contributed to this story
 .
Demand and prices of property are unlikely to decline as a result of the housing finance scam racket unearthed
by CBI earlier this week, according to the country's top developer DLF and consultant Jones Lang LaSalle.
     
"Property prices are sub-set of demand. We do not foresee any negative impact on demand. Hence, the prices
will not come down," Jones Lang LaSalle India Chairman and Country Head Anuj Puri told PTI when asked about
the likely impact of housing finance scam on property demand and prices.
     
Puri, however, pointed out that the banks would be more cautious in lending to developers, who in turn would
have to depend more on other sources like private equity for funds.
     
Echoing similar views, DLF Group Executive Director Rajeev Talwar said: "Property demand depends on the
growth of the economy. Any individual misdemeanour should not impact the growth of the real estate sector."
    
The views of DLF and JLL differ from HDFC Chairman Deepak Parekh who, yesterday, had said that there could
be correction in property prices as a fallout of the housing finance scam.
     
"Some developers will bring down the prices and sell... the unsold stock with developers is huge across the
country. In this scenario, prices cannot go up definitely," Parekh had said.
     
On November 24, CBI arrested LIC Housing Finance CEO Ramachandran Nair and seven other top bankers for
allegedly colluding with Mumbai-based Money Matters in sanctioning housing loans meant for individuals to
corporates.
     
"There will be repercussions in terms of increased caution by banks while lending to developers. Borrowing will
become more expensive and the process involved in getting it lengthier as banks increase their vigilance levels,"
Puri of JLL said

The housing loan scam which came out last week has led to the stock market crashing and
realty,hosuing,construction and banking stocks were down the hill. Here are some of the impacts
of the housing loan scam.

Number of distributers is on slide: The housing loan scam last week brought with it a number of
problems and difficulties to be faced by the real estate developers and home loan companies.
Despite being offered coupon rates of about 12.50%, investors are still wary of investing in
corporate fixed deposits. This has resulted with decrease in number of home loan lenders.
Fund raising efforts led to vain: Efforts have been made by raising funds by five reality firms and
seven home finance companies. Coupon rates are being offered at 10.50-12.50% by Ansal
Housing & Construction, Ansal Properties, Jaiprakash Associates and Unitech. And 8-9% interest
on deposits is being offered by Godrej Industries.

Government to draw tight controls and checks: The real estate companies will have to face strict
checks and controls as per investment experts. Along with this if there is decrease in investments
from banks, private equity and mutual funds as well then they may have to face serious
consequences.

Margin calls to be triggered:  In order to meet the margin calls developers may face problems in
case the property prices fall and they have borrowed money by placing land/project as collateral.
And so may have to place more property as collateral or borrow money at high cost.