Project financing a challenge in real estate

Venue—Hotel Kohinoor Continental

Moderator—Pranay Vakil, Chairman, Knight Frank India

Panelists—Kruti Jain, Director, Kumar Urban Developers

Sunil Dahiya, MD, Vigneshwara Developers

Atul Modak, Head, Kohinoor City

Ravi Sinha, CEO & Managing Editor, Track2Realty

Kruti Jain: I believe any funding available in real estate is gap funding. It is not about only the gap which is there in funding for real estate because what happens for other industries is that they have this reserve capital which is not their land or raw material, but is the actual capital they put in to manufacture xyz product and then they replenish the funds with whatever returns are accrued. In our case, we do not have any such capital which replenishes except for the internal accruals for flats which we put into the next project immediately because you want to build a brand and snowball effect.

What happens is we take project financing which is, let us say I am doing 10 projects and I have some receivables, some outgoings, and some projects maybe lagging in sales. So I have a cash flow deficit. What I do with this cash flow deficit is that I go to a bank and get a construction loan because that is the only legal way of funding for the unorganized sector. And obviously, you have the ‘sahukars’ whom you can use as you want.

The problem starts when this so-called cash flow crunch or deficit culminated because you moved the receivable that you got from your flats and the construction loan into inventory of land which will develop in 5-6 years time. The basic philosophy of funding is short term and long term which even I as a real estate developer understood very late. It is a standard practice in other industries because they actually have designated vehicles through which they can take long term and short term loans.

Sunil Dahiya: That is because the government has laid out a certain banking reform to see them as priority lending, for example automobile industry.

Kruti Jain: No, the SLR that the government has set, the basic concept is that the bank will have to put more money as deposit or security if they want to lend to our sector. And that is one of the reasons why the bankers who lend to the real estate sector are very selective because there is less money and more players trying to chase it. So obviously, the selection criteria are very stringent. And that is why, in spite of having stringent selection criteria, you land up giving 2-3 times security deposit.

And when you are looking at this whole scenario vis-a-vis other industries, the difference is that you have a fixed input cost and you have fixed output there. For us that is not the case. Three primary reasons – one, we have no idea when our project will be launched. Two, we have absolutely no idea what will be the next hurdle our project will face due to which there will be a pause. And three, we have definitely over leveraged ourselves. As an industry, that is this year’s prime problem.

And in the last year the sentiment also went through a very big high and a very big low. If you are summarizing this year’s emotions, this is the only answer. But if you are summarizing funding, I think this year has been incredibly innovative in funding. You name the vehicle and it has been tried and tested and the funny part is that other industries want to know how we did it. They can not understand how it happened in terms of the structure.

…..to be continued