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Financing Options in Real Estate in India An Overview. Structure of presentation. Users of Capital and Needs. Sources and Providers of Capital. Financing Instruments – A Snapshot. Financing Instruments. Definitions. Sources. Features. Regulatory Trends. Title Insurance. Participants. - PowerPoint PPT Presentation
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Financing Options in Real Estate in India
An Overview
Structure of presentation
Users of Capital and Needs
Sources and Providers of Capital
Financing Instruments – A Snapshot
Definitions
Sources
Features
Financing Instruments
Title Insurance
Regulatory Trends
Users of Capital and Needs
Financing for acquisition, refurbishmentsEnd User
Asset Acquisition, Asset Management, RefurbishmentsAsset Owner
Direct Financing, RefinancingFinancer
Land acquisition, Development/ ConstructionBridge financingDeveloper
NeedsParticipants
Generic Needs
Seed funding to initiate project/ acquisition Working Capital Requirements Realization of future cash flows at current date Lowering the cost of capital Tax Efficiency
Sources and Providers of Capital
Public Offerings , REIT/ REMF, AIM, Pension Funds, Insurance Fund
Public equity
Real Estate Funds, VCF, FII, HNI, End Users (through advances)Private equity
Banks, FI, NBFCs, REIT/REMF, Government bodiesPublic debt
Private trusts, Private syndicates, HNIsPrivate debt
ProvidersSources
Sources and Providers of Capital
Financing Instruments – A Snapshot
Financing Instruments – A Snapshot
Bonds, Term loans, CC limits, Bridge Loans, ECB, Lease Rental Discounting, Asset Backed and Income Backed.
Debt
Private Equity - HNI/ Institutional, Venture Funding, Public listing, REMF/REIT, Preference instruments, End User AdvancesEquity
Mezzanine funding, CTL, convertible instruments, Mortgage Backed Security (RMBS, CMBS, CMO), option linked instruments, Asset Backed Securities, Collateralized Debt Obligation, Covered Bonds, Convertible Bonds, FCCB.
Structured Instruments
Definitions – Debt Instruments
Debt Instruments can be Income Backed or Asset Backed.
They can be fixed rate instruments of adjustable rate instruments.
Bonds : Issued by companies to raise debt for funding their capital requirements. Eg – Infrastructure bonds raised by NHAI which also have a tax exemption status. Some of this might be available to township development projects in the future.
Term Loans : Loans provided by Banks, FIs as project financing with pre determined payback schedules, rates and tenure and against collateral. The loans are usually structured on a case to case specific basis guided by sectoral exposure norms of the Reserve Bank of India.
Cash Credit Limits : This is a facility for funding interim cash requirements subject to a draw down limit. Interest is charged on the amount outstanding and the period outstanding.
Bridge Loans : Also known as "interim financing", "gap financing or a "swing loan“, this loan helps to meet short term cash flow requirements till permanent financing is secured. These are short term loans ( < 1 yr) with higher interest rate and some collateral.
External Commercial Borrowings (ECB) : The current guidelines allow for overseas borrowings for the infrastructure and construction development sector subject certain guiding conditions. This provides access to cheaper source of funds and is subject to currency risks.
Lease Rental Discounting (LRD) : Securitization of future rent receivables.
Structure – Corporate Debt Market in India
Definitions – Equity Instruments
Private Equity HNI/ Institutional : The equity raised is not from the public markets and hence not freely tradable on public exchanges
Venture Capital Fund : Type of private equity capital provided by professional, institutionally backed investors to new or growing businesses
Public listing : These could be initial public offerings or further public offerings. A company can use this route to access the public financial markets for raising capital by divesting equity subject to certain entry norms as guided by SEBI.
REIT : These raise funds from the public markets and invest either in the real estate either directly (through acquisition of properties) or indirectly (through mortgages)
REMF : Also raise funds from the public market and invest in real estate directly in RE properties, MBS, Equity shares/bonds/debentures of listed/unlisted RE companies
End User Advances : Funds received in advance from the ultimate owners of the property
Equity Issuance
Issues
RightsPublic Private Placement
Qualified Institutions Placement (For listed
companies)
Preferential Issue (For
listed companies)
Private Placement (for unlisted companies)
Initial Public Offering(For unlisted companies)
Further Public Offering(For Listed companies)
Fresh Issue Offer for sale Fresh Issue Offer for sale
Definitions – Structured Finance / Hybrid Instruments
Mezzanine funding: Typically unsecured, high yield, subordinated debt or preferred stock which is senior only to company’s shareholders.
Asset Backed Securities: These securities are backed by a pool of financial assets ranging from mortgages to accounts receivables.
Mortgage Backed Securities: Its an ABS where the asset is a pool of Mortgages eg: RMBS, CMBS, CMO
Credit Tenant Lease: Landlord sells property to an SPV and the SPV borrows money against a pledge of the rentals. The right to rentals is further divided into classes of securities each being subordinate with higher promised returns. The landlord typically buys back the first loss piece.
Second Mortgage: A mortgage on real estate which has already been pledged as collateral for an earlier mortgage. The second mortgage carries rights which are subordinate to those of the first.
Collateralized Debt Obligation: typically securitizes a diversified pool of debt assets. These assets, corporate loans for instance, are split into different classes of bonds (known as tranches) that pay investors from the cash flows they generate.
Covered Bonds: similar to ABS but the assets remain on the issuers balance sheet
Convertible Bonds: A convertible bond is type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio eg: FCCB.
Option linked instruments: Instruments with embedded options like call, put, floor, ceiling, floor, collars, convertibility etc.
Financing Instruments
Past Current Future
Domestic Public Equity (REMF / REIT)
Refinancing Options
Secondary Debt Markets
Access to Overseas Public and Private Debt Markets
Hybrid capital from Banks, FIs
Pension Funds & Insurance Funds
Debt Debt
Asset and Income backed debt
Lease rental discounting
Consumer mortgage
Asset and Income backed debt Lease rental discounting Consumer mortgage ECB
Equity Equity
Individual Private Equity
Public Markets – (limited access)
Venture Funds
Institutional Private Equity – Domestic and Overseas.
Individual Private Equity
Debt Instruments - Features
Past Current Future
Other benchmark linked rates Non Recourse options
Higher Amortization periods – 20 – 30 years
Widespread sources of Debt Flexible exposure norms Bond Placements, Tax Credits
and other Municipal Finance Alternatives
Collateralized Mortgage Pools, Collateralized Debt Obligations and other Credit Derivatives
Debt Debt
PLR linked interest rates High Recourse – often to
promoters Amortization period –
Generally 5-7 years Low availability
PLR linked interest rates High Recourse – often to
promoters Amortization period – upto
10 years max Limited availability Banks more willing now but
stringent norms from RBI
Debt
Equity Instruments - Features
Instrument Features in the past
Current Features Future Possible Features
Guidelines to allow direct access to overseas Public Markets
Equity exposure by Domestic Public Equity sources- life insurance , Pension Funds.
Equity Equity
Limited mainly to High Net worth Individuals and End User Advances
Public Equity not widely available
High risk perception due to absence of institutional participation
Venture Funds both Domestic & Overseas now allowed
FDI allowed Successful Public Equity
raisings in 2006 Successful AIM, LSE
listings in 2006
Equity
Hybrid Instruments - Features
Instrument Features in the past
Current Features Future Possible Features
Senior and Junior Mezzanine Debt
Straight, Convertible and Participating Second Mortgages
Swaps, Options, Caps, Collars, Swaptions, Captions, etc
Hedging Options
Hybrid Hybrid
Mezzanine Funding being explored
Funding with Convertible options being explored
Preferred Equity Structures RMBS
Hybrid
Typical MBS Structure
Source: CMSA
Credit Tenant Lease Structure
Regulatory Trends
RBI has hiked the risk weightage of the commercial real estate exposure to 200% from 150%
Risk weightage on home loans increased to 100% from 75%
General provisioning requirement for banks on standard advances to residential housing loans beyond 20 lakhs and commercial real estate loans increased to 1% from 0.4%
Exposure to SEZ will be treated as exposure to Commercial real estate
Norms for Banks
Regulatory Trends
Two sets of Norms for NBFCs investing in Real Estate proposed for those who avail public deposits and those who dont.
Under the new norms, finance companies which accept public deposits can not invest more than 10% of their net worth in land or property, except for its own use. At the same time, investment in unquoted shares of a company that is not a subsidiary has to be limited to 10% of net worth.
Loan and investment companies are, however, allowed to invest up to 20% of their net worth in unquoted shares.
Current guidelines require asset finance companies to ensure that 60% of their loans go to lease and hire-purchase of machinery, the remaining 40% is used by finance companies to fund the real estate sector. If a finance company acquires land or property or unquoted shares in exchange of its bad loans, these assets have to be disposed off by the NBFC within three years.
Norms for NBFCs
Regulatory Trends
REMF
SEBI approved the guidelines for REMFs in June 2006
Initially REMFs will be Closed ended
Directly in RE properties within India
Will disclose NAV on a daily basis
Mortgage backed securities
Equity shares/bonds/debentures of listed/unlisted companies dealing in properties and development
Other securities
They can invest
Title Insurance
Internationally recognised means of covering the title risk in property transactions.
Protects owners and lenders against any claims against the title guarantees that the mortgage is valid, enforceable and of first priority.
A general insurance policy will usually cover the insured against a future event which may or may not occur.
A title insurance policy covers the insured for past events; that there are, for example, no mortgages registered over the land as at the date of the insurance policy.
Title Insurance
Lenders title insurance, also called a Loan Policy
Owner's title insurance.
The availability of title insurance in India will reduce the risk perception of public debt and equity institutions thereby triggering a greater availability of capital
Type of Title Insurance