After Implementation Of RERA, Developers Explore New Fund-Raising Avenues

Pre-launch projects were one of the most common ways for real estate developers to raise funds until recently. However, with the implementation of the Real Estate Regulatory and Development Act, 2016, this option is not available to the developers.

The sector is at an inflection point where developers have to embrace the change and find more organised channels of raising funds.

Moreover, with fundraising becoming difficult, the developers will have to understand the feasibility of the projects before planning one. The financiers will also expect everything in order, right from project planning to delivery. They will want to know how their funds are being utilised at various stages of project development. Hence, it is imperative for the developers to design a business plan for each of their projects, just like any other corporate house of any other organised industry.

Equity-based funding could gain traction

The coming years may witness projects vying for equity-based financing — venture capital (VC), private equity (PE) and subsequently, public equity. According to a report released by a real estate advisory in September, the PE funding in the Indian real estate sector is expected to exceed $4 billion by the end of 2017. This number is highest ever since 2010.

With various policy reforms turning the sector more organised, investors from countries, including Canada, Japan, Hong Kong, Singapore, China, Qatar and Netherlands, are showing their interest in the sector.

These modes, however, will need to secure ownership stake in the projects.

Moreover, the launch of Real Estate Investment Trusts (REITs) will bring forth more opportunities for large and established players.  

Better prospects for debt-based real estate funding

Before the Real Estate (Regulatory and Developement) Act, 2016, came into force, banks and financial institutions used to put real estate projects in the 'high risk' category, in the absence of sufficient regulatory compliance processes and oversight.

This outlook may change once developers fall in line with the regulatory framework that promotes transparency and financial discipline in the sector.

From developers' perspective, debt financing makes more sense as it is relatively low cost and free from any obligation to share ownership stakes in the projects.

Meanwhile, the next few years will witness a major breakthrough in real estate project financing scenario and it is all likely to be a win-win situation for all the stakeholders, be it developer, financier or buyers.