In a move to help the cash-strapped builders and developers by attracting investments into affordable housing and smart cities, the Cabinet on Wednesday approved relaxation in construction foreign direct investment (FDI) norms.
Minimum capital requirement for project pinned with norms for minimum built-up area and capitalisation have been liberalised, suggest sources.
Suresh Kris, CFO, Brigade Enterprise sees relaxed norms for 100 percent FDI in construction as a shot in the arm for the sector with an anticipated increase in demand for land.
On the flipside, YD Murthy, Executive VP-Finance at NCC says the FDI notification does not pertains to real estate developers and not engineering, procurement and construction (EPC) companies but they will bid for EPC projects if NHAI bidding comes up, he says in an interview to CNBC-TV18.
Recently, NCC’s rights issue were oversubscribed, of which most proceeds will be used to reduce short-term loans and NCDs, says Murthy adding that company’s debt-equity ratio will change favourably post rights issue, increasing its net worth to over Rs 3,000 crore.
Below is the verbatim transcript of YD Murthy and Suresh Kris’ interview:
Q: The overnight announcement that you can get FDI for affordable housing especially even for smaller or cheaper units, does that materially change the game for you?
Kris: FDI investment into affordable housing has been in talk for a while. Apart from other points like reduction in the minimum area from 50,000 sq m to 20,000 sq m and cap rate from USD 10 million to USD 5 million. But still, the area is only 60 sq m of area and out of it again 21 to 27 sq m should be the carpet area and 35 percent of the units has to be committed to this and 30 percent of the total cost should be committed to the affordable housing. 60 percent of the floor space index (FSI) area to be committed to affordable housing.
These criteria are there but one big positive is that there is no minimum capitalisation or there is no minimum area definition into this. Maybe, for Brigade or for any other developers who are having small land parcels which would not have been qualified for FDI earlier may qualify for this now.
Q: But are they waiting for to come, FDI that is?
Kris: FDI may come into this, which is what I am saying because again some of the FDI companies those who don’t want to invest so much India on to a specific project of those sizes, it is easy for them to come in.
Q: Do you have any affordable housing projects. Are you planning to get into this segment in a big way and have you seen any interest from foreign players?
Kris: We already have one sovereign fund for our projects and we already have entered into MoU with GIC Singapore earlier. So that is already there but presently we do not have any affordable housing as such but again going forward depending on the market absorption demand and our involvement into developing those segments definitely will clarify more.
Q: Your take, will you need FDI in any of your EPC projects, do you see interest, is yesterday’s announcement making things easier for you?
Murthy: The government notification pertains to real estate developers and not for construction and EPC companies and as such, we are not in need of any foreign investment in contracting business that is our bread and butter business. We already have various international investors on the equity side in our company. So they are already there supporting the management and company.
Q: Some EPC guys notably L&T, have got into housing construction in some ways. Are you not planning to do that?
Murthy: We have a subsidiary called NCC Urban that is focused on real estate development, predominantly residential development. So that could be beneficial to NCC Urban. We will have to examine how the notification is.
Q: A couple of players told us just a while back that among listed developers, many are not looking at private equity investors right now because at least the ones who are getting money, most of them get cheap money. So the cost of borrowing is between about 12 to 15 odd percent while the returns that PE investors would expect would be much higher. So what is the appetite like from the listed players’ point of view or from the developers’ point of view?
Kris: From developers’ point of view we could say that even though the borrowing cost maybe from 11 to 14 percent the cost of equity maybe much higher. There is no doubt about it. Whether it is structured dealings or even pure equity dealing and affordable housing will give that much return or not I do not know, but those who are having smaller land parcels can go into that and who are not able to borrow money at these levels but only the way out is only that FDI kind of thing these kind of FDI are into affordable, number one.
Secondly, the big question which I have apart from the affordable housing which you can also throw some light which is a significant change from the earlier one is that 50 percent of the development has to be done in five years or something from the approval date which has been dispensed with now. So there are a lot of projects by other developers. It is not applicable to Brigade, whereas some projects or some companies where the projects have been abandoned for a long time and that three-year minimum lock in period may not be relevant for them because 50 percent of the area has been developed, but that condition has been taken out now. So it is only three years lock in period which is a significant move for real estate companies where they are already stuck up with large projects like that.
That is a significant move rather than affordable housing because affordable housing like low interest rate and some benefits all those things are there in play for some time but it has not attracted so much. By lowering the project size I don’t think so much of appetite will happen immediately in affordable housing.
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Q: So because of all these announcements what do you think will happen to real estate prices? Do you think that they could move lower because of expected increase in supply?
Kris: There could be a demand for land that is less than capable of developing 50,000 sq m. That is one, which we can definitely say and if somebody wants to do a plot development that could also improve. So these are the improvements not only for affordable housing but definitely there could be increase in demand for land because of relaxation in the housing plots where all these have been taken out.
Secondly, any FDI investment into the completed projects like running of a mall, shopping complex or business centres like this coupled with Real Estate Investment Trust (REIT) when you now say even some of the FDI may be interested into those mall management companies wherein there is no other criteria because all those things has been into the automatic road where it was not pronounced earlier.
So these are some of the reforms definitely it will address and taking away the main condition of 50 percent development in five years from the approval date only restricted to three year lock in period definitely will give a lot of room for the existing FDI players who have already invested but they want to get out of those investments that will give a new way. I do not know what could be the outcome now because whether it is retrospective change or prospective we do not know presently. So if it is there then definitely lot of players may go out of the locked up land and again some may come with good players because they want to reshuffle their portfolio with good developers in India. So that will definitely happen.
Q: This is more to do with recent developments in your company. The right’s issue was oversubscribed, which is quite a positive. We haven’t had an infrastructure company being able to do that. Just give us the math now on debt equity interest out-go for this and the next year?
Murthy: We have successfully closed the rights issue; it is oversubscribed by above 14 percent and because it is the rights issue we will retain whatever shares we have decided to allot that is about Rs 598.7crore. All this money should be flowing into the company in next two-three days subject to base of allotment approval by Bombay Stock Exchange (BSE) and all that. So bulk of this money will go towards debt reduction in the parent company.
It is already given in the object clause of the offer document and accordingly nearly Rs 500-530 crore of rights issue money will go towards reduction of debt by way of payment of the short-term loans, non-convertible debentures (NCDs) and things like that. Now what will happen is because the rights issue Rs 600 crore is come to us the net worth of the company is going to increase to around Rs 3,000 crore and the debt in the books of the company on a standalone basis is coming to around Rs 2,000 crore.
That is improving the debt equity substantially 0.6 or so which is a good indicator and also because the debt has gone down in a full year I will be able to save interest of yearly Rs 60-70 crore that will add straight away to our bottom-line.
From next year onwards, things will be very positive for the company and also the macro environment is also improving. So, we will definitely be on a good growth path as we go forward.
Q: Do you get in to the black if I remember right; you made a small loss last time.
Murthy: First quarter, there is a nominal loss about Rs 3 crore, mainly because of the high interest burden that we are carrying.
Q: So right away in this quarter itself you get into the black or you get into the black in the third quarter?
Murthy: I can not comment on that because our board is meeting on November 13th to consider the second quarter results then only the actual picture can be known to us and also to the investors and the general public.
Q: What’s the update on sale of projects you had one with Sembcorp. Is there any more in the pipeline will we hear some more sale of build-own-transfer (BOT) projects from you?
Murthy: The Sembcorp deal would have already signed the documents and we got caught of our investment back also. The balance amount is expected to come to us only after the coal ministry approval. That approval is also expected in the next two to three months because the new government is in place and they are also putting in place lot of measures to see that power generation is improved. So in the next two-three months that approval also can be expected and then we get the balance money which is nearly about Rs 470 crore that will be useful for our working capital.
Q: I agree with you what I was asking was is after Sembcorp are there any other build-own-transfer (BOT) projects that you are looking to monetise?
Murthy: We are looking at monetising to road projects that is Western UP Tollway and Bangalore Elevated Tollway. Discussions are going on with the potential investors. However, this is a very early stage I can not comment much on that. May be in the next 12 months at least one project can be monetised.
Q: What are you hearing from NHAl are there any bids that are out. You seem to be the most solvent guy to bid so should we hear of something. What can your order book look like before the year is out?
Murthy: Our order book has been quite robust and last year, we beard nearly Rs 10,000 crore of new orders much more than what we anticipated. It has come as a pleasant surprise and also because the competitive intensity has come down to some extent we are able to get these orders with better margins.
In the current year, the same trend is likely to continue so order recreations should be quite good as far as the current year is concerned. As far as BOT roads are concerned, we have taken a decision at a board level not to bid for BOT projects. But if EPC contracts are coming we will definitely participate.
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