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Does covid-19 spell the end for real estate NBFCs in India?

Not even government stimulus measures are expected to stop non-bank property lenders from retreating after being further challenged during the pandemic.

Private equity real estate firms are expecting more investment opportunities in India as the covid-19 outbreak has exacerbated the liquidity issues of non-bank lenders, despite government efforts to help.

Last week, the Reserve Bank of India announced a 300-billion-rupee ($4 billion; €3.6 billion) special liquidity scheme for non-banking financial companies, housing finance companies and microfinance companies, as part of the broader effort to fight the impact of covid-19 on the country’s real estate market. NBFCs play an important role in real estate financing in India, accounting for 53 percent of total credit to builders and developers in the 2019 financial year ended in March, according to RBI.

Following the default of NBFC IL&FS in late 2018, the total assets managed by the real estate NBFCs declined by around 10 percent between March 2019 and December 2019. “Many of these NBFCs were using significant short-term liabilities to finance long-term assets in the real estate sector. And this has led to a huge asset-liability mismatch on their balance sheets,” explained Ashish Singh, partner at London-based private equity firm Actis. Instead of lending actively, these real estate NBFCs have been focusing on “properly building the liabilities side of their balance sheets.”

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The decline has continued as housing finance companies, including Dewan Housing Finance Corporation and Indiabulls Housing Finance, have also defaulted on their loans.

“In addition to a structural dislocation amidst shrinking book sizes, rating downgrades and rising borrowing costs, the added liquidity crunch due to covid-19 has made it even harder for NBFCs to disburse new loans,” said Yesh Nadkarni, managing director of real estate in KKR India.

But not all NBFCs are the same, Nadkarni told PERE, adding that the firm anticipated the turbulence in the market two to three years ago. Backed by KKR’s own balance sheet and Singaporean sovereign wealth fund GIC, KKR India Real Estate NBFC has implemented a conservative leverage policy with no exposure to short-dated commercial paper or the bond markets. The firm declined to disclose its leverage levels, but told PERE that it has originated over $1.7 billion worth of loans across over 40 positions in the country.

Today, Nadkarni sees opportunities to provide last-mile financing to projects when most NBFCs have become more cautious about lending. “Project credit metrics for developers are being stretched. They are facing increasing debt costs as project cycles have been extended and top-line growth has been limited due to muted sales prices. These conditions make it hard for their loans to be refinanced by banks/NBFCs,” explained Nadkarni. Nearly 470,000 units across the seven largest cities of India that were schedule to complete this year are at a high risk of being delayed because of the lockdown, according to Mumbai-based real estate services company ANAROCK Property Consultants.

For Singh, he expects more opportunities in the mezzanine and preferred-equity space to emerge from the pandemic. “Many NBFCs will likely continue to diversify away from real estate and limit their incremental lending in real estate to the senior debt space, which is freeing up a lot of space for private equity investors like us. I also anticipate many developers will divest or offload quality assets at attractive valuations to reduce leverage,” he said.

Anshuman Magazine, chairman & CEO, India, South East Asia, Middle East and Africa, CBRE, had seen more long-term, patient capital from foreign private equity investors starting to tap the Indian real estate market even before the pandemic. Last year, real estate giant Blackstone acquired a 97.7 percent stake in India’s largest independent affording housing finance company, Aadhar Housing Finance Limited.

Singh believes the pandemic will further diminish the role of NBFCs in real estate financing, with non-bank lenders continuing to focus on repairing their balance sheets and diversifying away from real estate financing in the next few years. “I don’t anticipate competition from real estate NBFCs crowding out private equity capital in the real estate market over the next few years, which had been the case during 2014-18,” he noted.