Sales pick up: HNIs resume lending to real estate developers
By Raghavendra Kamath
High net-worth individuals (HNIs) are showing a renewed interest in lending to property developers as residential sales pick up in top cities and prices start inching up.
Unlike in the past, HNIs are now looking to lend to developers in a structured way so that their investments are well covered.
Shobhit Agarwal, managing director of Anarock Capital, said such deals have gained currency of late, given the pick up in residential sales. Agarwal has advised for half-a-dozen such deals in the recent past. In a recent deal in Mumbai he is privy to, the developer raised Rs 50 crore in three days from a clutch of HNIs. “Earlier it was impossible to raise that kind of money within such a short window,” Agarwal said.
However, Agarwal added that the investors’ returns from structured debt deals have come down from 24-30% in the pre-Covid period to 16-20% now, given the increase in liquidity in market and shrinking margins in real estate projects. “Money is going to only credible players,” he said, adding that HNIs are now seeking to lend Rs 15-50 crore to a developer compared to `50-150 crore earlier as they seek to diversify the risk.
Earnest.me, a platform set up by former KKR director Ashish Khandelia, which allows investors to invest through senior secured debt opportunities, recently funded by a developer in Chennai saw many HNIs participating in it.
Senior secured debt is a kind of debt where it is backed by an asset that is pledged as a collateral and lender has first claims of the borrowing entity’s cash flows.
“There is an increasing interest among HNIs and family offices in higher return debt ideas yielding 14-15%. Institutional investors have been playing this theme for the last couple years and have invested over $2 billion. With a residential rebound now more visible, domestic capital is also looking to participate,” Khandelia said.
The platform allows investors to put as low as Rs 10 lakh against the minimum investment threshold of Rs 1 crore in alternative investment funds.
Ankur Srivastava, chairman – GenReal Property Advisers, who advises HNIs on real estate investments, says: “The structured real estate debt market is also evolving to accommodate investor needs and perceptions. After IBC, structure enforceability, collateral cover and quality are looked at very closely now. Also, the fund manager’s track record is a decision driver for investors. Finally, technology is also being used to enhance reporting, management and compliance standards.”
Srivastava said that investors are happy with mid-teen returns provided the structure is safe, collateral value is two times and project cash flows are live.
“Investors are more interested in minimising risk than maximising returns,” he said.
Kaushik Desai, managing partner, Walton Street India, agrees. He said, “Investors are risk-averse. It is not a mad rush. They are looking at the track record of managers and developers before writing cheques,” he said.
Walton Street Blacksoil Real Estate Debt Fund II is raising a Rs 500-crore fund, of which 90% has been raised, he said. Desai said earlier investors were looking at only returns but now they are looking at risk-reward ratios also. “Investors are looking at how much risk they are taking and how much returns they are getting,” he said.
Sanjay Dutt, managing director of Tata Realty & Infrastructure, said family offices and HNIs have been increasingly looking at real estate in the last 12 months. “It started with distress deals now going to reputed developers where upside visible in next three years,” Dutt said, adding that HNIs and family offices want to do last-mile financing.
“Developers think that since sales are happening, they can pay extra and finish projects,” he said. However, Dutt clarified that its housing arm is raising funds only from institutions.