Funding Options for Developers KeyurS Shah Saturday, 16 July 2011 ICAI WIRC, Mumbai 1
Content External Commercial Borrowings Debt Institutional/ Non Institutional Hybrid Instruments Mezzanine Financing PE Funding Initial Public Offerings Real Estate Investment Trusts 2
External Commercial Borrowings External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments ECB can be raised for investment, new projects, modernization/expansion of existing production units in the real estate sector infrastructure sector and specified service sectors namely hotel, hospital, software in India. Infrastructure sector includes industrial parks Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns 3
Institutional Banks/NBFCs Financial Institutions DEBT Non Institutional Listed NCD s Construction Finance Lease Rental Discounting Loan against Property Advance Disbursal Facility 4
Listed Non Convertible Debentures Can be secured or even unsecured INR denominated and No TDS Non residents can purchase through secondary market (limits auctioned by SEBI) Infrequently traded Listed on BSE/NSE Issues to consider Disclosure Control over ownership Cost of issuance 5
Construction Finance RBI does not permit bank lending for land purchases. Banks may insist on even developer equity for part of construction cost Construction forms a very small component of the overall cost especially in Mumbai Construction finance converted into LRD property is leased 6
Lease Rental Discounting Lease Rental Discounting (LRD) is a term loan offered against rental receipts derived from lease contracts with reputed tenants. The loan is provided to the lessor based on the present discounted value of the future rentals Lease Rental Discounting lets you avail loan depending upon the future cash flows Institutions incorporate a buffer for interest rate increases, expenses/taxes and TDS 7
Loan against Property A loan against property (LAP) is exactly what the name implies -- a loan given or disbursed against the mortgage of property. The loan is given as a certain percentage of the property's market value, usually around 40 per cent to 60 per cent. More expensive 8
Advance Disbursement Facility This facility is granted against the future cash flows especially residential projects Objective is for construction financing Less expensive than construction finance 9
Hybrid Securities Hybrid securities combine the elements of debt and equity Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date, at which point the holder/issuer has conversion option More common examples include convertible preference shares/debentures Developers get tax break on coupon and subsequently it converts to equity 10
Convertible Debt Convertible Debt is of two types: Compulsory Convertible Debentures (CCD s) Optionally Convertible Debentures (OCD s) CCD s can be issued to a foreign and/or domestic investors while OCD s cannot be issued to non residents 11
Compulsory Convertible Debenture Structure (CCD s) Cyprus/Singapore Entity Mauritius Entity CCD s Equities Indian SPV 12
Optionally Convertible Debentures (OCD s) The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue. Cyprus/Singapore Entity Mauritius Entity CCD s Equities Promoters OCD s Indian SPV OCD s Domestic Investor 13
Preferred Return Structure No single, pre-defined structure used by all investors. Waterfall/preferred structures commonly used internationally Preferred return Capped equity return Waterfall structures 14
Mezzanine Financing Mezzanine subordinate to senior debt but above equity in hierarchy Usually attracts higher coupon rate than what would be on the senior debt Often mezz has an equity kicker which increases the overall returns Used for land acquisition in real estate 15
Public Markets IPO s REIT s AIM 16
Initial Public Offerings Real Estate IPOs no longer flavour of markets InvestorslostmoneyinalmostallIPOs Volatile Markets Global sentiment is negative for real estate Valuation mismatch 17
Real Estate Investment Trust (REIT) AREITisacompanythatowns,andinmostcases,operatesincomeproducing real estate such as apartments, shopping centers, offices, hotels and warehouses. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. REIT attractive for issuer and investors Attracts retail and institutional investors Significant global requirement for yield assets Relatively lower risk than equity Higheryieldthanpuredebt Unlike debt has potential for limited equity upside Annuity income for developer Better realization than strata sales Effective utilization of asset 18
REIT REIT s are currently not allowed in India. Evenmutualfundsarenotallowedtoinvestinrealestate. InIndiaonlyVenturefundsareallowedtoinvestinrealestate 19
Issues with REIT s in India Valuation of properties is a non standardised process Lack of authentic data on the transactions Land titles and multiple regulators create confusion Must be listed when retail investors get involved in order to provide liquidity 20
AIM Several developers raised money Mostly trading at discount to NAV Hostile shareholders have replaced asset manager During equity boom it was easy to raise money on AIM 21
Q&A 22
Disclaimer The information contained in this presentation is of a generic nature and is not intended to address the circumstances of any particular situation/person The content provided here treats the subject and issues covered herein in generic form and is purely for academic purposes only The views expressed, if any are the speaker s personal views and do not represent views of any organization/institution 23
Thank you 24