They are hand-holding small and medium developers to complete unfinished projects and even go the extra mile to sell unsold inventory on their behalf.
Small and medium-sized real estate developers who are under pressure to secure funding to complete projects or face penalties imposed by Real Estate Regulation and Development Act (RERA), are now turning to their lenders for help. Financial institutions on their part are all too willing to help and adopt a more hands-on approach. They are hand-holding small and medium developers to complete unfinished projects and even go the extra mile to sell unsold inventory on their behalf.
Lenders adopting a hands-on approach
Lenders are now hiring project managers and even recruiting technical staff to oversee project completion. They are topping up working capital on under-construction projects to ensure that they get completed, and are also underwriting and distributing unsold stock on behalf of developers.
Many small and medium-sized developers have suffered from a loss in reputation due to delays in projects. Having financial institutions with strong balance sheets to assist them is helping them in completing delayed projects. Homebuyers, too, are reposing confidence in the lenders and investing with them, say real estate experts.
The trend is only going to increase in the next 12 months, they say.
“We offer a single interface to small and medium scale developers - a service package involving finance, distribution of residential units. This arrangement works well for both the lender and the developer. It gives the lender visibility in all aspects of the construction activity - progress of construction, pace of sales and financial position of the project. Developers receive finance at a certain rate, new customers through our distribution networks and project management support. Developers instead of liaising with different people and different aspects of projects, get all services under a single platform. Homebuyers get the endorsement of credibility that financial institutions provide. Such arrangements, in their infancy now, are bound to increase in the near future,” says Anil Kothuri, Chief Executive Officer and President of Edelweiss Retail Finance Limited.
Changing role of lenders
Several financial institutions are building their sales machinery to sell unsold inventory. Buyers too are ready to buy residential products from them rather than the developer. “By underwriting inventory and entering into distribution deals with developers, lenders are ensuring that the project cash flows are on track and that projects will be completed on time,” says Sahil Vora, Founder and Managing Director, SILA, a real estate services company with interests across facility management, project management and real estate advisory.
Lenders, who had invested money in projects only to find that the developer has defaulted, are underwriting unsold inventory at discounted prices, say experts. “If the under construction market price of the unit is Rs 25,000 per sq ft, the stock is picked up around Rs 21,000 per sq ft with the view to sell the stock at strong premium post completion,” they say.
SILA is doing project management on behalf of lenders. It has streamlined cash flows, budgets and overall project schedules for them. In some cases they have also worked with the developer’s sales teams to push inventory as per the requirements of lenders and the project cash flows, says Vora.
“Signing development management and joint ventures agreements with small and medium developers on under-construction projects, offers a huge brownfield opportunity in real estate over the next 12 months. RERA, GST and demonetization have broken the back of many developers and the sector will see consolidation in the near future. It is the large developers with strong balance sheets who will thrive,” says Vora.It must be noted here that lenders are now taking a more proactive role because all information regarding project stakeholders is now public under RERA. If they have lent to a developer who has not delivered or misappropriated funds, it negatively affects their reputation too for backing the wrong developers.