In this post, Chaim Citronenbaum tells us about the importance of finance in real estate marketing to get more profit.

1. WELCOME

2. REAL ESTATE FINANCING-
OPTIONS & ISSUES

3. The asset classes in real estate sector can be
divided into :
 Residential
 Commercial/IT offices
 Retail
 Hospitality segments
 Industrial Parks/SEZs
Warehousing
INTRODUCTION : REAL ESTATE

4. SECTOR DYNAMICS
Driving Force
Residential – changing demographics, urbanization, ease of finance
Office Space – IT, Telecom and BPO;
Retail – new retail formats and entry of global brands;
Hotels – domestic business travel and domestic tourism; and
Warehouses – organized retailing and requirement of logistic services.
 Current annual Indian real estate market size is estimated @ US$ 40 bn
• Residential 70%
• Commercial segment 25%
• Organized retail, industrial warehouse and hospitality combined at 5%
 To promote institutional funding in the sector FDI norms were relaxed in 2005 ( Red Tape to
Red Carpet)
 During 2005-10, industry recorded growth of 30% CAGR and is concentrated in the top 7
metros.
 7 cities account for approximately 70-75% of Grade A office space in the country, with a
leased space of around 279 MM sq.ft. ( as against 373 mm sq.ft in Manhattan , London is
210 mm sq.ft.)
 Real estate market is expected to grow at a CAGR of 20%, with an estimated market size of
US$ 180 bn by 2020

5.  BANK CREDITS:
-CC/OD/ PROJECT LOAN
- FACTORING
- LC/BG(Non fund Based)
- LRD
- LAP
 EXTERNAL COMMERCIAL BORROWING
(ECB)
 PRIVATE EQUITY- DOMESTIC FUNDS
 FOREIGN DIRECT INVESTMENTS-
CCD/CCP/EQUITY
 FCCB/ADR/GDR/QIP(For Listed Co.’s)
 Listing in International markets such as AIM
FINANCING OPTIONS

6.  Purpose: To meet working capital
requirements.
 Amount of facility: Based upon the Bank's
assessment of the working capital requirement
(WIP & book debts)
 Security:
 Charge on current assets
 Collateral(s) on case to case basis.
 Interest Rates: 12% -16%
BANK CREDIT – CC/OD/ PROJECT
LOAN

7. Factoring is a service that covers the financing & collection of account
receivables of series of trade transactions between a seller & a buyer in the
domestic market as well as international market.
Advantages:
 It is among the quickest way to get advance cash.
 Cost effective with the cut in invoice processing and collection activities.
 Getting cash with factoring helps in eliminating the risks of bad debts.
 It helps the company in concentrating over more projects.
 It gives an opportunity to offer credit to customers.
 It helps in building credit history and no long-term obligation.
BANK CREDIT – FACTORING

8. Letter of credit(LC) is a written undertaking by a bank( issuing bank) given to
the seller (beneficiary) at the request and in accordance with the instructions
of buyer (applicant) to effect payment of a stated amount within a prescribed
time limit and against stipulated documents provided all the terms and
conditions of the credit are complied with.
Bank guarantee is a type of guarantee in which a bank promises to repay the
liabilities of a debtor in the event that the debtor is unable to.
The contract of guarantee has three parties Principal Debtor, Principal
Creditor, Guarantor i.e. Bank
BANK CREDIT – LC/BG

9. Lease Rental Discounting (LRD) is a type of Term Loan offered against rental
receipts derived from lease contracts with corporate tenants.
 Quantum:
 Based on the discounted value of the rentals
 50% to 75% of underlying property value.
 Maximum Tenure: 9-15 years ( Linked with lease period, lock in period,
quality of tenant etc.)
 Repayment Mode: Generally Rentals are payable by the tenant directly to an
escrow account with lending bank.
 Security: The underlying leased property will be taken as prime security.
BANK CREDIT - LEASE RENTAL
DISCOUNTING

10. Loan against property is similar to other loans
like home loan, Equipment Loan etc.
Quantum of Loan: Depends on type of
property &
income of the borrower
Tenure: Flexible for 1 – 15 years
Interest Rates: 11%-14%
Security: Charge on Property and
LTVs are
generally at 65- 70% of PMV
ANK CREDIT -LOAN AGAINST PROPERTY

11.  ECB allow corporate to access the foreign currency loans through
commercial bank in the form of loans,suppliers’ credit, fixed rate
bonds, non-convertible, optionally convertible or partially
convertible preference shares availed of from non-resident lenders.
 Since January 2009, ECB route has been opened for the development of
Hotel projects, integrated townships & Industrial Parks.
 For Industrial Parks ECB is allowed under automatic route while for SEZ
& Integrated township development ECBs is allowed under approval
route.
 Real Estate companies like Jai Prakash Associates, Unitech, HDIL and
AMR Construction, etc. have used ECB to raise funds.
ECB - GUIDELINES
EXTERNAL COMMERCIAL BORROWINGS ( ECB)
Maximum Loan Amount:
Corporate engaged in hotel, hospital & software sectors: Up to USD 200
Million
Real sector ( Industrial & Infra): up to USD 750 Million

12. Tenure:
 Up to USD 20 Million: Min Avg maturity of 3 years
 Above USD 20 Million: Min Avg maturity of 5 years
ECB - GUIDELINES
Cost:
Average maturity period All-in-cost Ceilings over 6
month LIBOR
Three years and up to five
years
350 basis points
More than five years 500 basis points
Prepayment:
Prepayment of ECB up to USD 500 million may be allowed by
AD Banks without prior approval of RBI subject to compliance
with minimum average maturity period as applicable to the
loan.

13. FDI are investments made in
home country by foreign investors.
Total FDI in India’s housing and real
estate sector till date is about 19 bn USD
Besides the Foreign Funds there are
certain Indian Fund houses which have
raised foreign capital and are sponsoring
FDI funds- prominent names are Tata,
Piramals, Sun Group, ILFS.
FOREIGN DIRECT INVESTMENTS
Major Players
Sun Apollo
Wells Fargo
Morgan Stanley Real
Estate
Goldman Sachs Real
Estate
GIC, Singapore
Blackstone

14. Particulars NRI Other non-residents
Direct investment
in immovable
property
Possible –
Purchase of agricultural
land / plantation / farm
house excluded
Not possible –
However foreign companies are
allowed to acquire immoveable
property with approvals, for
branch office & places of
business.
Investment in
SPVs - Investee
entity
 Partnership firms / sole
proprietorship (on non-
repatriation basis)
• Companies
• Only companies
Nature of real
estate activity
• SPV cannot engage in
agriculture / plantation /
real estate business
(dealing in land /
immovable property)
• Housing, townships,
infrastructure
• Hotels and tourism
• Industrial parks
• SEZs
FDI IN REAL ESTATE

15. Particulars Regulations
Minimum area of
development
• Serviced housing plots –10 hectares(1 lakh Sq mtr)
• Construction – development projects - 50,000 sq
meters
• Combination projects – either of above two conditions
to be met
Investment
limits
• WOS – min capitalization of US$ 10 million
• JV with Indian partners – US$ 5 million
• Investment within six months of business
commencement
Lock-in
restrictions
• Original investment locked-in for 3 years from the
date is in brought-in( However, the FIPB has clarified
that the definition of original investment is the entire
investment)
Project
development
• 50% of the project to be developed in 5 years from the
date of obtaining statutory approvals. (under-
developed plots cannot be sold)
FDI -REGULATIONS

16. Particulars Route
Hotels,
tourism and
hospitals
• 100 percent permitted under automatic
route
• Hotels include restaurants, beach resorts
and other tourist complexes providing
accommodation and/or catering and food
facilities to tourists
Industrial
parks
• 100 percent permitted as per the Industrial
Parks Scheme, 2002
SEZs • 100 percent permitted as per the SEZ policy
FDI IN OTHER REAL ESTATE ACTIVITIES

17.  Subscription of shares by Non-Resident
◦ Issue price shall not be less than:
◦ In case of listed companies- Price worked out as per SEBI guidelines.
◦ In other cases- Fair valuation of shares worked out and certified by a
Chartered Accountant.
 Transfer of shares
◦ By Non-Resident to Resident: Sale price shall not be more than
◦ Listed company
 Transaction through a stock exchange - prevailing market price
◦ Unlisted company
◦ A price which is lower of:
Independent valuation of share by statutory auditors of the company
Independent valuation of share by a Chartered Accountant or Merchant
Banker ( the mechanism prescribed for the valuation is DCF)
◦ By Resident to Non-Resident – Pricing shall be same as in case of
subscription of shares by non-resident
◦ Non-Resident to Non-Resident : No price restrictions
PRICING GUIDELINES

18. Issue Views/ challenges
Minimum capitalisation
norms
Would acquisition of existing shares from promoters
be considered towards the minimum capitalization
norms
Lock-in requirements Meaning of ‘original investment’ for the purposes of lock-in
requirements:
 Would the entire investment be locked-in for 3 years
 Would investment up to the min. capitalization be locked
in
 Would lock-in apply only for the 1st tranche of
investments
FIPB has clarified that the definition of ‘original
investment’ is the entire investment and each tranche
which is locked in from the date it is brought-in. However,
FIPB can grant a specific approval on case to case basis.
Time-limit of six months from
commencement of business
 Does it imply that investments may only be made in
newly incorporated companies- Not necessary
 Impact on enterprise-level investments- No
 Do all non-FDI-compliant projects need to be hived off -
Yes
KEY ISSUES

19. Execution of
projects through
step down
subsidiaries
Approval required for
investment in holding
companies
Approval required to form step
down subsidiaries for project
execution
Project execution
through partnership
firms
Is this permitted? Not permitted
Does it require approval- Yes
Hive-off / de-merger
of projects
subsequent to
investment
Does it imply that minimum area
requirements are not complied with –
Need to comply
KEY ISSUES

20. Issue Key challenges
Investment in
companies
holding
agricultural land
• FDI policy prohibits investment in agricultural land /
plantations / farm houses – FDI may have to come in only
after conversion of agricultural land.(But ok if in
development zone of master plan)
Repayment of
Investment to
Non-resident Investors
• Preference shares / debentures to compulsorily convert – Yes
• Buyback of equity – Quantum / pricing restrictions apply
Choice of overseas
jurisdiction for routing
investments
• A number of treaties believed to be under review
• Will Mauritius, Cyprus treaties be renegotiated ????
Return on Investments •Preference shares – coupon rate benchmarked to SBI Base rate
•Debentures – Lack of clarity on maximum coupon rate
KEY CHALLENGES

21. Particulars Before amendment After amendment
Foreign investment
through preference
shares
Foreign investment
through debentures
• Preference shares that were
redeemable and / or optionally/
partially convertible came
under the FDI regime
Debentures that were not
convertible or partially / optionally
convertible did not come under
ECB regime
Any preference shares issued after 1st
May, 2007 to be part of equity only if they
are compulsorily convertible. In all other
cases, they will be considered as debt and
will have to comply with the ECB
guidelines.
Also, existing investments in such shares
may continue till their current maturity.
Only fully and mandatorily convertible
debentures, within a specified period of
time, would be reckoned as FDI; all other
debentures would be regarded as ECB.
FOREIGN INVESTMENTS THROUGH PREF SHARES & DEBENTURES

22.  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, Parsvnath
Developers, HDIL, DLF etc.
 Foreign Currency Commercial Bond (FCCB) is a mix between a
debt and equity instrument issued in a currency different than
the issuer’s 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.
FCCB/ADR/GDR/QIP(For Listed Co.’s)

23. Real Estate Mutual Funds ( REMF)
Real Estate Mutual Funds – Introduction
In simple terms, Real Estate mutual funds are close ended mutual funds
with a lock-in period of 3 years. These mutual funds will invest in real estate
properties and being the owners of these properties, they will let out these
properties on rent. The rent so earned will be distributed to investors as
dividend. When the mutual fund attains maturity, the company can sell its
holdings and return your investments.
SEBI has kept the scope of the REMF wide open, as the guidelines allow
REMF to invest in the following sectors:
• Directly in real estate properties within India
• Mortgage (housing lease) backed securities
• Equity shares of companies which deal in properties
• Other securities like debt instruments

24. EURO