AIF funds may offer a few additional items that banks are not allowed to give by RBI regulations, such as loans for land purchase or fees for land clearances.
financing via category II to developers of real estate Because banks and even home finance organizations only offer money for building projects—not always for the purchase of land—AIFs have grown in popularity.
Alternative investment funds (AIFs) have been a popular means of funding real estate projects at a period when banks and other financial institutions have grown cautious when lending to the real estate industry.
Industry participants claim that Category II AIFs are leading the way in providing money to realtors via their subscriptions to non-convertible debentures, or NCDs, that are issued by developers.
According to sources, there has been a significant increase in the number of AIF funds with a real estate concentration created recently due to high demand from investors and developers. AIFs have less complexity than banks, despite the fact that banks provide lower interest rates on loans.
"We're getting more and more requests from real estate developers for both growth capital and re-capitalization," Amit Bhagat, managing director and CEO of ASK Property Fund, said.
According to him, the reason why financing to real estate developers via category II AIFs has gained popularity is because banks and housing finance companies only grant money for building projects, not always for the purchase of land, which is something a fund can handle. Moreover, he continued, banks do not provide money for increases in working capital needs.
According to a source who spoke on the condition of anonymity, RBI regulations prohibit banks from providing loans for land purchase or costs associated with land clearances, among a few other uses for an AIF fund.
According to Siddharth Mody, Partner at JSA Advocates & Solicitors, "not only are the banks reluctant to lend to real estate, but even if you agree to lend, the commercials come out to be very difficult (for realtors)."
He goes on to say that while it is feasible in AIF for private parties to negotiate the conditions, banks normally do not alter loan terms.
An counsel to a real estate fund said that banks are often not too keen to lend to building projects. In addition, banks are reluctant to lend to real estate and would rather only to bigger, finished developers in the wake of the real estate downturn that occurred between 2009 and 2015.
This is the method via which AIFs are used for financing.
The first step in the process is a meeting when the investment manager of AIF and the realtors discuss the projects and financial requirements in detail to determine the quantity of the capital that needs to be generated.
This is significant from a regulatory standpoint as well since, according to guidelines established by the Securities and Exchange Board of India (SEBI), an AIF is not permitted to hold more than 25% of its assets in a single firm or other entity.
After then, the investment manager starts to solicit money from his clients. Once the money is collected, the real estate company creates NCDs, which the AIF purchases.
Although there are other methods for an AIF to finance a real estate developer, industry participants claim that NCDs—which corporations use to obtain long-term capital that cannot be converted into equity—are the most popular method.
This is comparable to the corporation receiving an AIF loan. It also has to be redeemed at some point since it cannot be turned into equity. Joseph said, "This is more akin to paying back the loan."
In fact, the real estate firm will be required to pay a particular coupon on the borrowed money; normally, these coupons vary from 14 to 15 percent, but they may even reach 22 percent.
"The type of cash flows the company is generating will determine how frequently the coupon needs to be paid," an unnamed source said.
