Asset management firms are setting up non-banking financial companies (NBFC) to bridge the capital deficit in the real estate sector.
More than half a dozen institutional investors are in the process of procuring a licence to set up a new NBFC, buying out an existing NBFC or reviving an existing but dormant entity to start lending.
Real estate NBFCs have steadily become key capital providers to developers, particularly those who don’t have easy access to banks and large private equity (PE) funds.
Asset management firm Rising Straits Capital, founded by Subhash Bedi, who also co-founded Red Fort Capital, is in the process of acquiring an NBFC. Once it’s done, Rising Straits will infuse equity capital into it and capitalize it before it starts lending.
“It makes logical sense for us to progress in this direction because we have the required skill and mindset,” said Kalyan Chakrabarti, managing director, Rising Straits Capital.
It plans to lend to different real estate asset classes including residential, office, hospitality, warehousing and education, where the initial focus will be to give small to medium sized loans for 3-5 years.
This year, Red Fort Capital’s NBFC Red Fort Capital Finance Pvt. Ltd has started actively investing from its lending book in residential and commercial projects.
“There is no better time to be in the NBFC business than in a slowdown scenario when developers need capital. We provide speed capital that is flexible and tailor-made to meet a developer’s needs and we do anything from land acquisition financing to deficit financing to last-mile funding to inventory funding to special situation funding,” said Abhiram Himanshu, director, Red Fort Capital. It will invest between Rs.35-60 crore across 5-7 transactions before it goes on to do larger deals and is focusing on funding developers in Bengaluru and Hyderabad.
Following a separation between Red Fort Capital co-founders Bedi and Parry Singh, the former set up Rising Straits Capital.
The NBFC lending space is a crowded one, with tough competition among peers and from private equity funds, which have transitioned from being equity-givers to debt lenders. Yet, the opportunities are many and the possibility to make decent returns remains substantial.
Canada’s Brookfield Asset Management Inc. has applied to the Reserve Bank of India for an NBFC licence, said a person familiar with the development. “The plan is to fund residential project lending in relatively large ticket deals of Rs.200-400 crore,” said the person, who did not wish to be named.
Financial services firm ASK Group, which has also applied for a licence earlier this year, will set up an NBFC that will do both real estate and non-real estate funding.
Sunil Rohokale, chief executive and managing director of ASK Group, said an NBFC is a “strategic fit” in the company, which currently has a real estate fund business along with wealth management and private equity funding. It is tough to estimate how much money NBFCs have pumped into real estate in the last few years, but to put things in perspective, Piramal Fund Management Pvt. Ltd (PFM) is an apt example.
Of the Rs.32,000 crore of PFM’s assets under management, including equity investments and commitments made but not yet disbursed, around Rs.28,000 crore is from its NBFC, including construction finance. From Rs.1,600 crore in early 2014, PFM has scaled it up to Rs.28,000 crore, building a successful business in India’s worst slowdown.
“The market needed a one-stop shop for capital and we provided that,” said Khushru Jijina, managing director, Piramal Fund Management.
Milestone Capital Advisors Ltd has recently revived its NBFC Milestone Finvest, and plans to deploy both debt and equity from its fund business, said a person familiar with the development, who didn’t wish to be named. Financial services firm Lodha Ventures has hired an agency to decide a name for its NBFC, said founder Abhinandan Lodha.
“From the NBFC, we want to offer debt to less-known developers, who are specialized in certain micro-markets. Growth capital has to be provided to them, as they may not have the ability to approach large NBFCs,” Lodha said.
To be sure, loans from NBFCs are more expensive than bank finance, but they are more flexible and offer customized solutions to developers.
“NBFCs offer both early-stage land financing and last-mile funding crucial to developers. The challenge is to find the right investments under deployment pressure. Smaller NBFCs with limited pools of capital may find it tougher than large NBFCs, who have a large platform which balances out the risk. So, the key is to attain scale,” said Nikhil Bhatia, managing director-capital markets India at property advisory CBRE Asia Pvt. Ltd.