Well-managed Real Estate Investment Trusts (REITs) can give returns of 10-12 per cent to investors, which is higher than fixed debt returns from fixed deposits (FDs), pointed out Sharad Mittal, Director & Head of Motilal Oswal Real Estate Fund. In an interview with BusinessLine, he dwells on several issues, including IL&FS and RBI holding rates. Excerpts:

How has the IL&FS fiasco affected liquidity for developers, loans for buyers, and the

general sentiment?

The IL&FS fiasco has created panic in the debt markets with many NBFCs and HFCs coming in the line of fire. However, the government has already indicated that it would not allow IL&FS to collapse. Many HFCs and NBFCs have mushroomed and grown rapidly in the past five years as banks tightened liquidity, when the RBI prodded them to clean up their balance sheets citing growing NPA concerns.

This growth will see some contraction in the next few quarters, where the primary focus of NBFCs will be on the quality and liquidity of their assets. Also, fresh funds are now being raised at least 250 bps higher than that of last year.

The real estate sector would be impacted, as most of these NBFCs would pass on the burden to the borrowers, resulting in increased borrowing rates for developers. So, while project credentials have not changed – owing to stagnant prices across cities, and increased lending rates resulting in higher interest costs – NBFCs might find the security cover for their projects getting shrunk.

On top of that, sales might be hit as mortgage and home loan rates have already inched upwards, and any new customer would now reconsider or wait before going in for a home loan.

As for general sentiment, the upcoming festival season will be impacted, with smaller-sized NBFCs busy addressing liquidity concerns and customers being wary of the increased home loan rates.

We will see limited real estate deals happening over the next one year. However, we see this period as an opportunity to get well-structured early-stage deals at better yields with the top developers.

The RBI kept rates unchanged this month. Some real estate players said it is an encouraging sign. What are your views? Is there a cause to be optimistic?

The RBI had hiked interest rates by 25 bps in June and August owing to rising inflation and volatility in crude oil prices. Many had expected another 25 bps hike in October as the rupee’s slide accelerated and liquidity concerns emerged.

While the RBI has decided not to increase interest rates this time, it has changed its stance from ‘Neutral’ to ‘Calibrated Tightening’ where the extent of tightening would depend on any upward pressure on inflation. While for the time being the decision will not impact the sector, the changed outlook would mean interest rates going up in the future.

This would mean increased borrowing rates for developers. With lack of equity in today’s market, developers might reconsider their borrowing options with the increased interest servicing obligations.

Real estate sales might also see a slowdown in the next one year due to the recalibration of the loan amount eligibility for buyers with the increase in home loan rates.

When do you think REITs will mark their presence on the stock exchanges?

No REITs are listed on the stock exchanges as of now. However, two InvITs were listed on the stock exchange last year, but the performance has not been great so far. India has a rent-yielding office inventory of 537 million square feet valued in excess of $70 billion, of which 283 mn sq ft is REITable.

In September 2018, Blackstone Group-backed Embassy Office Parks filed an offer document with SEBI to raise over ₹5,000 crore through a REIT. We expect the first REIT to be listed by the end of this financial year.

For retail investors, REITs are a cost-effective way to gain exposure to real estate. REIT will be mostly about rental-income-generating assets. In comparison, retail investors today usually get entry into projects that are largely residential in nature. One can expect 7-8 per cent annual returns and another 3-4 per cent from capital appreciation from a well-managed REIT.

Hence, the total REIT return at 10-12 per cent is higher than the fixed debt returns from fixed deposits, etc. We believe that in the next five years, there will be further listing of REITs on the stock exchanges, and this will be an ideal debt-plus product to fill the vacuum in investors’ portfolios.

What have been some of your big transactions this year. And what is on the anvil in the next 12 months?

Some of the large transactions we have done in the past 12 months include Akshaya Group and Casagrand Group, in Chennai; ATS Group, in NCR; Cybercity Developers, in Chennai; and Spenta Group, in Mumbai.

Tell us about the progress of your India Realty Excellence Fund IV (IREF IV).

IREF IV announced its first close in August 2018 at ₹575 crore. We had started raising funds in June. We plan to raise the balance funds by the end of this financial year. IREF IV’s strategy would be an extension of the investment strategy of MORE’s earlier two funds (IREF II and IREF III).

The fund plans to deploy the capital in mid-income/affordable residential projects across the top six cities in India, while selectively investing in commercial projects. IREF IV would focus on early-stage structured equity/structured debt investments with established developers, and undertake 12-15 transactions of ₹80-150 crore each. We have a strong pipeline of deals for the fourth fund and plan to make our first investment very soon.

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