Nisus Finance Services (NifCO) is a start-up alternatives manager with a real estate focused debt / mezzanine fund. It is backed by Amit Goenka, who was MD & CEO of Essel Finance, part of the $7-billion Zee TV Group.

In an interview with BusinessLine , Goenka, Managing Director & CEO at NiFCO, said the traditional approach to real estate capital, which was based on landowner joint ventures, pre-sales and customer advances, has faded and developers are resorting to alternative funding routes by tapping into HNIs and through corporate tie-ups.

What is the prevailing mood in access to funds in the real estate sector?

There is a need for capital, which has been greatly accentuated on the back of the slowdown in sales compared to the projections/ assumptions, and by constant regulatory changes requiring plan modifications, extended approval and re-approval costs, litigation, FSI charges and consumers shying away from discharging stage-based payments in favour of subvention or other financing schemes.

All this has put extraordinary pressure on project cash flows. There is a general sense of gloom and caution, especially in taking on new projects.

Funds are being raised largely for existing pipelines and commitments.

How big is the gap between the demand for capital supply from traditional institutions such as banks?

The total exposure of banks, which stood at over ₹11 lakh crore ($165 billion), has only shrunk to below ₹10 lakh crore. The demand for capital annually exceeds ₹50,000 crore outside of the banking sector only within housing projects in major locations.

Private institutional capital sources are unable to contribute more than ₹8,000-10,000 crore annually. Hence 80 per cent of the capital needs are still unfulfilled. So, institutions are cautious, setting up terms that protect capital under stress scenarios, are selective about investment partners, and conduct extensive due diligence and partner discovery exercises.

Developers who are geared for the long haul to recovery sacrifice short-term profits for long-term gains and work in a systematic and disciplined fashion as required under the private institutional capital regime. They are able to then find capital support quickly.

In the absence of large-scale bank funding for the real-estate sector, how are builders and developers trying to raise funds?

Large corporate developers or those with a strong credit and development history are able to access public debt markets, deposits, foreign institutional investors and other sources of global capital.

However, in general, given the margin pressure and uncertainty in cash-flow timing, reputed developers are exerting caution in resorting to expensive private capital through funds, NBFCs and other private sources due to the costs and terms.

There is a greater bias among developers towards equity and quasi equity capital even if it means sharing the upside and profits with capital partners.

Is there a noticeable change in trends post RERA (Real Estate regulation and development Act, 2016) in the realty sector, especially in terms of alternative funding?

There is a sense of reform that is sweeping the industry even before RERA is implemented. Developers have become aware of the requirements under RERA and have already started moving their processes, systems and business practices to suit the regulations. Alternative funds are finding it easier to put in place a financial discipline since it also now coincides with RERA requirements. Developers are cautious about development, regulatory and local norms, making it simpler for funds to invest, conduct due diligence and create alignment with their investments.

As a matter of fact, developers are now able to appreciate and welcome the stringent cash flow and management norms required by funds as it is helping them put in place businesses that are RERA ready.

How has the asset class performed for alternative funders in the last one year?

The paradigm shift in the approach towards capital, emerging discipline in compliance among developers, and higher-risk adjusted returns backed by strong assets, are drawing a huge crowd among private capital investors.

Returns have been strong and consistent for RE fund managers over the last two years on the back of structured finance, including senior and subordinated debt. The track record of investments and exits of funds post 2010 has allowed for subsequent fund raises, and assets under management have grown substantially over the last three years. General PE investors such as Brookfield, Apollo and KKR have also jumped onto this bandwagon with larger corpus commitments.

How are small and medium builders gearing up to offer affordable housing?

Increasingly, projects are being re-designed for smaller, 1-2 BHK units, prices and amenities are being rationalised and delivery times accelerated to cater to this growing demand. Several budgetary and monetary incentives have further fuelled this activity.

Investors and funds are also flocking to such projects, which largely cater to the MIG and Lower HIG segment, since these products have one of the fastest sales velocities.

However, catering to the small ticket (sub-₹15 lakh) continues to be a challenge for developers, and funds are still cautious about the efficacy of this model. Only select bi-lateral and multi-lateral institutions or global investors have shown an inclination to back strong players who cater to this LIG segment.

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