May, 2011

Salvus Strategic Advisors JLT

An approach to Real Estate financing
Prepared for an Indian IT Park


This document provides a brief overview about the real estate financing. We discuss
various options available to developers, sector regulations and major issues in financing
real estate in the country.


REAL ESTATE-FINANCING: OPTIONS AND ISSUES

Approach to Real Estate Financing Indian IT Park

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INTRODUCTION: REAL ESTATE IN INDIA
The Indian economy continues to ride the high growth curve, with the Central Statistical
Organization (CSO) pinning the GDP growth rate for financial year 2010 at 8.6%. The GDP is
expected to rise to more than 8% in 2011-12 (RBI).The real estate market has managed to
withstand the pressures of economic downturn and witnessed a revival in late 2009 and
consolidation in 2010.

Following a gradual recovery of Indian (and global) economic activity, the real estate market
witnessed significant investment interest and transaction activity in financial year 2011.
Economic recovery also resulted into residential investment and increase in retail sales. This
enhanced absorption levels across the country, thereby putting a halt to the downward
movement of demand. Investors came back into the market, looking at attractive valuations and
returns, generating activity in the office, residential and land market.

The real estate sector can be divided into residential, commercial, retail and hospitality
segments. Commercial segment also includes Information Technology (IT) parks which cater to
booming IT industry.
INFORMATION TECHNOLOGY PARKS


Private Sector IT Parks: Due to a phenomenal growth in Indias software export which
resulted in increased demand of commercial space, private real estate players developed IT
parks which were leased to IT companies. Major players include DLF, K Raheja, Godrej
Properties, Mahindra and Unitech.
IT Parks developed by Software Companies: Additionally, large IT companies are coming
up with their own IT parks in order to meet their huge demand. TCSs Siruseri campus,
Infosys Mysore campus and Satyams Hyderabad campus are few such projects built by
large companies.


Information Technology (IT) parks are vast
commercial complexes spread over acres of land
housing the basic infrastructure and facilities required
for any IT business firm. Major players involved in the
development of IT parks include public sector entities,
private real estate developers and large IT companies.
Public sector IT Parks: Public sector entities aim
at making India a leading exporter of IT. They also
help in providing small IT companies with world
class infrastructure. Few of the public IT parks
include MIDCs SEEPZ in Mumbai, CIDCOs
International InfoTech Park in Vashi and various
STPIs parks in Bangalore, Hyderabad, Chennai,
Kanpur and other cities.
Approach to Real Estate Financing Indian IT Park

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FINANCING OPTIONS
BANK CREDIT
1

REGULATIONS BANK CREDIT
Reserve Bank of India has prescribed regulatory limit on banks exposure to individual and
group borrowers in India. These exposure limits are 15% and 40% of banks capital funds
2
for
single borrower and borrower group respectively. RBI also advises banks to fix limits on their
exposure to specific industry in order to avoid concentration risks. Real estate industry is thus
subjected to both individual/group borrowers exposure limit and industry specific limit.
Additionally, Urban Cooperative Banks (UCBs) are subjected to a ceiling of 15% of their total
deposit resources to provide housing, real estate and Commercial Real Estate (CRE) loans. Given
the risky nature of real estate industry, RBI has categorized this sector as sensitive sector and
has laid down some specific guidelines. These are as follows:-
Banks should frame comprehensive prudential norms relating to the ceiling on the total
amount of real estate loans, single/group exposure limits for such loans, margins,
security, repayment schedule and availability of supplementary finance.
Banks should ensure that the borrowers have obtained prior permission from
government / local governments / other statutory authorities for the project
Exposure of banks to entities for setting up SEZs or for acquisition of units in SEZs which
includes real estate would be treated as exposure to commercial real estate sector for
the purpose of risk weight and capital adequacy from a prudential perspective.
Banks should ensure that the bank credit is used for productive construction activity
and not for any activity connected with speculation in real estate.

1
It includes exposure to residential mortgages, commercial real estate, investments in mortgage backed securities
and fund and non-fund based exposures on Housing Bank and Housing Finance Companies
2
Capital Funds for the purpose will comprise of Tier I and Tier II capital as defined under capital adequacy standards
and as per the published accounts as on March 31 of the previous year
2.6
3.7
4.6
5.2
0
1
2
3
4
5
6
2006 2007 2008 2009
I
N
R

T
r
i
l
l
i
o
n

Bank Lending to
Real Estate
Lending by Banks continues to be the biggest
sources of capital for real estate companies in
India. Banks have shown a greater interest in
lending to the real estate sector from the past few
years. They finance the real estate sector by
providing mortgage loans to individuals. Banks
provide indirect finance to real estate sector by
giving loans to housing finance institutions and
developers. Some of the prominent Indian Banks
lending to real estate in 2010 are State Bank of
India (Rs 87,125 Crores)
1
, ICICI Bank (Rs 63,870
Crores), Punjab National Bank (Rs 30,717
Crores),HDFC Bank (Rs 25,293 Crores), Bank of
Baroda (Rs 22573 Crores), Bank of India (Rs
19,167 Crores) and Canara Bank (Rs 14952
Crores). Also international banks such as Asian
Development Bank (ADB), World Bank etc. also
fund need based housing projects.
Approach to Real Estate Financing Indian IT Park

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EXTERNAL COMMERCIAL BORROWING
External Commercial Borrowings (ECBs) allow corporate to access to foreign money through
commercial bank loans, securitized instruments, and investment by FIIs etc. Since January 2009,
ECB route has been opened for the development of integrated townships. Real Estate companies
like Jai Prakash Associates, Unitech and AMR Construction etc. have used ECBs to raise funds.
PRIVATE EQUITY

LIST OF PE INVESTMENTS IN INDIAN REAL ESTATE
Investor Target Company Amount (in USD
million)
Period
Red Fort Capital 3C Company 43 February10
IL&FS, IIRF India
and Moltana Holdings
Orbit Corporation 36 January10
Kotak Realty Fund Sunteck Realty 23 January10
Aranda Investments
(Temasek Holdings)
Sobha
Developers
21 February10
FOREIGN DIRECT INVESTMENTS

Minimum area to be developed under each project
Serviced housing plots 10 hectares
Construction-development projects 50,000 m
2

Minimum Capitalization
21
87
126
129
0
20
40
60
80
100
120
140
2007 2008 2009 2010
I
N
R

b
i
l
l
i
o
n

FDI in Real Estate
FDI are investments made in home
country by foreign companies. FDI in
Indias housing and real estate sector has
grown at a CAGR of 83% between 2007
and 2010.
REGULATIONS
Current guidelines allow up to 100%FDI
through the automatic route in township,
housing, built-up infrastructure and
construction development projects. But
the investment to be made will be
subjected to the following conditions:
Private Equity players have been very active in
the real estate sector especially in housing from
the past few years. Real estate sector had
received around USD5.5 billion in private equity
funding as on March 2009. Some of the major
investments include Sun-Apollos Rs 750 million
investments in Parsvnath, Portman Holdings Rs
2.75 billion investments in Kolte-Patil and Red
Fort Capitals Rs 1.15 billion investments in
Parsvnath. Structured debt-like instruments are
used in light of volatility these industry faces.
Approach to Real Estate Financing Indian IT Park

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Wholly Owned Subsidiaries USD 10 million
Joint Ventures USD 5 million
Original investment cannot be repatriated before a period of three years from
completion of minimum capitalization
At least 50% of the project must be developed within a period of five years from the date
of obtaining all statutory clearances
Project should conform to the norms and standards of the Government Body concerned
QUALIFIED INSTITUTIONAL PLACEMENT
Qualified Institutional Placement (QIP) route offers a cost-efficient way of raising funds from the
domestic institutional investors, thus offering an attractive alternative when overseas
borrowings dry up. This mode of fund raising has lesser procedural requirements. Real estate
companies that have raised money through the QIP route includes Unitech (Rs 55.6 billion),
Parsvnath Developers (Rs18 billion), HDIL (Rs 23.1 billion), DLF (Rs 38.7 billion) etc.
FOREIGN CURRENCY CONVERTIBLE BOND
Foreign Currency Commercial Bond (FCCB) is a mix between a debt and equity instrument
issued in a currency different than the issuers domestic currency. It acts like a bond by
providing regular coupon and principal payments but at the same time gives bondholders the
option to convert the bond into stock. Few of the recent FCCB issues include those of Videocon
Industries, Gitanjali Gems, Essar Shipping, Tata Steel etc.
CONVERTIBLE BONDS
Convertible bond is a bond that can be converted into a predetermined amount of the
company's equity, usually at the discretion of the bondholder. Real estate companies which
issued convertible bonds are Lodha Developers, Sahara Groups Realty arm etc.
RISKS IN REAL ESTATE FINANCING
1. Business Risk
a. Overall demand is getting reduced
b. Increasing interest rate hike affecting developers and end users
c. Inventory build up
2. Operational Risk
a. Inability of developers to match up with global standards
b. Low degree of transparency
3. Financial Risk
a. Non-availability of Real Estate Investment Trusts (a major source of capital for
real estate industry globally)
b. Funds which are denominated in foreign currency carries currency risk
c. Usage of black money in real estate transactions
d. Increasing interest rate
4. Regulatory Risk
a. Strict RBI norms as real estate sector is among the sensitive sectors
b. Delay in getting project-related approvals
c. Limited clarity on government policies pertaining to land usage and conversion
Approach to Real Estate Financing Indian IT Park

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Vishnu Deuskar
Managing Director
Mobile: +97 1504 552736 (Dubai)
Mobile: +91 99202 33363 (India)
E-mail: vdeuskar@salvuscapital.com

Vikram B Venkataraman
Director
Mobile : +9714 4572 298 (Dubai)
E-mail:vikramv@salvuscapital.com