In an exclusive interaction with B&E, Nikhil Bhatia, Head of Western Region for CBRE South Asia, talks about rising real estate prices, the role of fund managers and affordable housing
B&E: The Indian real estate sector is currently experiencing a phase of rising prices and low volumes leading to a massive dent in sales and home absorption rates across the country. Does it bother you?
Nikhil Bhatia (NB): There are three key components which drive real estate market growth. They are: strong counter parties, location, and pricing. Since top builders, say for instance the Tatas, the Godrejs, the Mahindras are partnering with counter parties that are bankable and inter-related, their projects get completed on time. This is especially applicable in a high interest rate scenario. Home buying sentiments fall because most banks refrain from providing funds for infrastructure development as a result of which the project gets delayed. If the counter party is strong, then the buyers confidence gets a boost.
B&E: Why are real estate prices rising in India, especially in Mumbai and the National Capital Region (NCR)? Do you think that private equity (PE) deals make real estate projects costlier and unaffordable?
NB: Nowadays, private equity players are entering into structured debt financed transactions with developers where the latter are given about 13% to 14% regular coupons by the former. The builders in return retain a balance in redemption as premium so that in case of a default, they can use the collateral as a safety net. Thus, a $14 coupon is serviced every quarter in transactions. If both a builder and a PE player are using land together at par, then they both agree to a 12% to 15% minimum hurdle negotiation. Probably PE deals are making projects costlier, but at the same time builders are left with no choice. They have to raise money and PE funding is the most accessible in times when banks stop lending. It’s another story altogether, of course, if the builder is cash rich enough to raise enough funds from internal accruals.
B&E: But this arrangement only works for builders and trading investors. Don’t you think this is the right time to do away with PE deals in the real estate sector?
NB: I don’t think so. In fact, if implemented wisely, PE deals benefit both, the investors and and the fund managers. A fund manager can buy land with PE funding. Builders see opportunities and buy that land making it a lucrative transaction. The higher the level of maturity the higher returns it generates for fund managers.
B&E: Are investments back in realty? How have revival strategies worked for top builders and services firm including CBRE?
NB: Yes, investments are really back. Undoubtedly there is enough capital available for the real estate industry even now. Fund managers are looking at the key takeaways while entering into deals with PE players. They can see their investments maturing in the next few years. In fact, companies such as Blackstone, Ascendas, New Vernon, and IDFC have shown interest in buying core assets.
B&E: The Indian real estate sector is currently experiencing a phase of rising prices and low volumes leading to a massive dent in sales and home absorption rates across the country. Does it bother you?
Nikhil Bhatia (NB): There are three key components which drive real estate market growth. They are: strong counter parties, location, and pricing. Since top builders, say for instance the Tatas, the Godrejs, the Mahindras are partnering with counter parties that are bankable and inter-related, their projects get completed on time. This is especially applicable in a high interest rate scenario. Home buying sentiments fall because most banks refrain from providing funds for infrastructure development as a result of which the project gets delayed. If the counter party is strong, then the buyers confidence gets a boost.
B&E: Why are real estate prices rising in India, especially in Mumbai and the National Capital Region (NCR)? Do you think that private equity (PE) deals make real estate projects costlier and unaffordable?
NB: Nowadays, private equity players are entering into structured debt financed transactions with developers where the latter are given about 13% to 14% regular coupons by the former. The builders in return retain a balance in redemption as premium so that in case of a default, they can use the collateral as a safety net. Thus, a $14 coupon is serviced every quarter in transactions. If both a builder and a PE player are using land together at par, then they both agree to a 12% to 15% minimum hurdle negotiation. Probably PE deals are making projects costlier, but at the same time builders are left with no choice. They have to raise money and PE funding is the most accessible in times when banks stop lending. It’s another story altogether, of course, if the builder is cash rich enough to raise enough funds from internal accruals.
B&E: But this arrangement only works for builders and trading investors. Don’t you think this is the right time to do away with PE deals in the real estate sector?
NB: I don’t think so. In fact, if implemented wisely, PE deals benefit both, the investors and and the fund managers. A fund manager can buy land with PE funding. Builders see opportunities and buy that land making it a lucrative transaction. The higher the level of maturity the higher returns it generates for fund managers.
B&E: Are investments back in realty? How have revival strategies worked for top builders and services firm including CBRE?
NB: Yes, investments are really back. Undoubtedly there is enough capital available for the real estate industry even now. Fund managers are looking at the key takeaways while entering into deals with PE players. They can see their investments maturing in the next few years. In fact, companies such as Blackstone, Ascendas, New Vernon, and IDFC have shown interest in buying core assets.
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