Realty companies choose primary market as their main source for raising capital.

By Abhay Shah, Realty Quarter

In the first half of 2019, property developers in India raised more money from primary markets than they rose in a decade. As from June, Prime Database reported that developers raised approximately Rs 10,023 crore from the primary markets via two qualified institutional placements (QIPs) and a real estate investment trust (REIT) initial public offering (IPO), which increased by an eight-fold over 2018, and the most in the past decade.

Subhrajit Roy, executive director and head, equity capital market origination at Kotak Investment Banking, said; that “equity market instruments have received more attention from large property companies in the last two years, as investors have shown a strong preference for organized brand developers with low debt levels and good records in execution.”

“To the contrary, the strong growth trend in commercial real estate contributed to the concern of shareholders in subscribing to the latest QIPs published by real estate companies, particularly those in Delhi NCR, Mumbai and Bengaluru,” he said.

Real estate firms which have so far met the majority of their financing demands by NBFCs or secondary markets now find primary markets an appealing way to raise capital with Indian corporate bond markets experiencing their worst downturn of a decade. As of 2017, Indian bond markets’ growth had slowed down and has shown their lowest rate in more than a decade later in May at 9.7%, according to Bloomberg’s economic index of June.

Secondary market investment sentiment, already shaken by the IL&FS crisis, in September 2018, continued to soar after mortgage lenders, the Dewan Housing Finance Corp. Ltd has postponed its outstanding bond interest payments. This has resulted in a liquidity crisis which has made it costly for NBFCs and in turn for real estate businesses to borrow funds from secondary markets.

But, although the capital investment in real estate firms peaks, interest on this is limited to big businesses with small concentrations of debt.

“Within big, well-established businesses with powerful balance sheets, investors’ confidence came back from implementing the Real Estate (Regulation and Development) Act (RERA). But a lot of developers still stay on the market and find it hard to raise funds. In itself, this shows that there will be significant consolidation in the industry,” said Motilal Oswal Investment Banking, Managing Director, Girish Nadkarni.

“We also see that big firm’s promoters are willing to take advantage of equity markets as stock prices have recovered and valuations have improved significantly, which makes it easier for them to raise funds via equity capital markets,” he said.

In March, the Embassy Office Parks REIT, backed by Blackstone, raised Rs 4,750 crore through Indian’s first REIT, while the DLF raised Rs 3,200 crore via a QIP and another Rs 21,100 crore from primary markets by Godrej Properties.

These issuances will only improve as the latest QIPs by large brands such as DLF and Godrej Properties add up to a favourable boost to the success of the excellent products within the immovable sector in the use of primary markets according to Salil Pitale, joint managing director and co-chief executive officer at Axis Capital.

Agreeing with Pitale, Motilal Oswal’s Nadkarni said: ‘As investors earn money on QIPs of large immovable companies and increase their risks, more mid-market players and some who want to raise funds to refinance their debt requirements are gripping primary markets.’