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Real estate funds are in trouble
Mon, 26 Oct Pre-Open

Real estate is an eternal favourite asset class in India. Everyone has an opinion about the sector. Usually, the opinion is that realty prices can only go up. It doesn't matter what the evidence says. The belief in this asset class is strong indeed.

However, the last few years have been a rude shock for real estate investors. Prices have stopped rising. In some cases, they have fallen. Despite this, home prices remain well above the reach of the common man.

Even worse are the horror stories of delayed projects, outright corruption, and poor quality construction. The sector has left investors and consumers alike with a bad taste in their mouth. The stock markets have not provided any respite either. Investors burnt their fingers so badly in 2008, they never returned to real estate stocks.

However, many investors found a new way to play this sector a few years ago. Usually, a real estate developer has only two choices to raise money. Debt from a bank or equity from investors. Recently, they received a bonanza from hybrid financing.

These deals go by the term Mezzanine funding. In such deals, investors received large initial payouts. Smaller periodic payments would follow. However, they would have to wait until the project generated enough cash flow to receive these regular payments. And that is the cause of all the heartache.

Real estate projects generate positive cash flow only when units are sold to end users. We are all aware that hasn't been happening for a while. Sky-high prices have prevented end consumers from bringing out their wallets.

Thus, it comes as no surprise to us that these deals are on the verge of default. As per an article in the Economic Times, the funds belong to reputed financial firms: HDFC, Kotak, Birla Sunlife, ICICI, IIFL, Edelweiss, Indiabulls, DFHL, among others.

Thus, it is clear that is isn't just the smaller developers that are struggling. The big players are seriously feeling the heat as well. This is a massive self-goal scored by the real estate players in our view. And there are no easy solutions to this mess.

Do you want to get to the bottom of this story? Are you interested in the future of the real estate sector? Then we highly recommend Vivek Kaul's (In)complete guide to Real Estate. Grab your free copy here.

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May 24, 2017 03:36 PM

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