Scarcity of funds is a major issue with real estate developers. With interest rates rising and banks unwilling to lend, traditional financing options have been exhausted. In such a tight liquid environment the sector seems to have found a new lease of life in the form of debt financing by overseas pension funds. As per news reports, the financing arm of Canada's pension fund has entered into a strategic alliance with an Indian conglomerate to provide debt financing for residential projects in India.
Corporate governance has been a grey area for real estate. Rampant corruption and poor transparency levels have eluded the sector of long term money. Hence, the entry of Canadian Pension Fund has come in as a big surprise. It has opened up a financing option other than banks for real estate developers who were starved of cash until now.
The fund will typically provide debt finance to local developers in affiliation with its alliance partner in India. And the finance will be typically used for purchase of land. In India, financing land purchase through bank loans is generally not permitted. Hence, the fund will create a niche for itself in this area.
Entry of pension funds is a good sign for the real estate sector. Now the developers will have access to long term funds. It may be noted that large residential projects have long duration. Hence, access to long term finance was a key issue. With the entry of pension funds, long term financing constraint will be resolved to an extent.
Pension funds typically have low risk tolerance as their priority is to meet the employee obligations that accrue during the period of service. Thus, they prefer to invest in domestic assets and that too which are very safe in nature. However, the fact that serious long term money is chasing asset classes that too real estate is a sign that global risk aversion has decreased. It also indicates that overseas investors are increasingly looking at better return opportunities abroad.