MUMBAI|BENGALURU: The changing liquidity scenario has prompted private equity funds and other financiers of real estatedevelopers to modify their structures of transactions to accommodate higher security covers and collaterals from builders looking to raise funds.
Financiers are now negotiating for additional cover from promoters as against primary securities and the project’s receivables that used to be marked as collaterals for the funding.
Funds are seeking more security while financing even joint development agreements(JDAs) that used to see an easy pass through earlier, given the shared risks and responsibilities.
Most funds are looking to finance established builders with structured finance that ensures minimum guarantee and downside protection. Earlier funds were available at 14-15% internal rate of return (IRR), but now that has gone up to 18% and above.
“Developers are now willing to take money even at higher rate of return with downward protection. Now, builders are chasing funds as there is no cheaper credit available from non-banking finance companies,” said Rajeev Bairathi, founder, Shearwater Ventures.
While financiers were earlier comfortable with lending on the basis of the mortgage of the specific project land and hypothecation of its receivables provided valuation sufficed the organisations’ cover requirements, there has been a paradigm shift in recent times owing to the delinquencies in real estate lending.
“Lenders have started demanding additional security if they are entering a project at its initial stage. This demand is justified as an initial level risk mitigant towards approval risk, construction risk or sales risk,” said Subhash Udhwani, founder of real estate-focused boutique investment bank Elysium Capital. “The demand varies across various institutions and the additional security is released during the tenure of the loan in case of good repayment and construction performance.”
Specifically, in joint development projects, lenders are now seeking extra receivables from the developers’ other projects because there is an inherent contingent risk of having a non-developer in the structure of the transaction. There have been instances wherein lenders ask for higher security and receivables cover than their standard limits because it helps them seek higher commitment from the developer.