Gift Deed – what ought to be followed while gifting a property?

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Gift Deed, Income Tax on house property, Real Estate, Real Estate Advice, Real Estate News, Real Estate Registration, Real Estate Regulations, Real Estate Transaction, Stamp Duty

A Gift Deed is defined under section 122 of the Transfer of Property Act, 1882.  As per the provisions, any immovable property can be transferred through a Gift Deed.  A gift deed is similar to a sale deed except that no money is paid in the transfer of the property. Like a sale deed, a gift deed too, has to be registered with the sub registrar under section 17 of the Registration Act, 1908, and as per section 123 of the Transfer of Property Act, failing which would render the contract invalid. Registering a gift deed gives it a legal status and establishes the ownership of the property. It also proves that all applicable government dues have been paid.  A gift deed cannot be revoked unless there is an agreement between the contracting parties stating that the gift can be revoked on the occurrence of a certain event. Hence isn’t it advised to add a clause of revocation while executing a gift deed in order to avoid glitches? Section 126 of the Transfer of Property Act provides for situations wherein a gift deed may be revoked by the donor.

Section 56 (2) (vii) of the Income Tax Act, 1961, states that a gift is not taxable if it is received by an individual or Hindu undivided family from any blood relative or as inheritance or at the time of marriage or in contemplation of death. But in any other context, if the aggregate of gifts received exceeds Rs 50,000 in a year, then the gift will be taxable as income from other sources.  Also, while registering the gift deed different states have different charges on stamp duty. Therefore it is a must that one checks the law of the state with regard to the gift deed, and then proceed towards the registration.

What is the right approach for entering into a Rental Agreement?

 A rental agreement is a contract, usually written, between the owner of a property and a tenant who desires to have temporary possession of the property as distinguished from a lease which is more typically for a fixed term.  As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term.

There is typically an implied, explicit, or written rental agreement or contract involved to specify the terms of the rental, which are regulated and managed under Contract Law.

The parties involved in the contract, the landlord and the tenant are identified in the contract. A housing lease may specify whether the tenant is living alone, with family, children, roommate, visitors. A rental may delineate the rights and obligations of each of these.  This also applies to whether or not pets may be kept by the tenant. On the other hand, the tenant may also have specific rights against intrusions by the landlord or other tenants, except under emergency circumstances. The term of the rental may be for a night (e.g., a hotel room), weeks, months, or years. There may be statutory provisions requiring registration of any rental that could extend for more than a specified number of years (e.g., seven) in order to be enforceable against a new landlord.

A typical rental is either annual or month-to-month, and the amount of rent may be different for long-term renters (because of lower turnover costs). If a tenant stays beyond the end of a rental for a term of years (one or more), then the parties may agree that the lease will be automatically renewed, or it may simply convert to a tenancy at will (month-to-month) at the pro-rated monthly cost of the previous annual lease. If a tenant at will is given notice to quit the premises, and refuses to do so, the landlord then begins eviction proceedings. In many places it is completely illegal to change locks on doors, or remove personal belongings, let alone forcibly eject a person, without a court order of eviction. There may be strict rules of procedure, and stiff penalties (triple damages, plus attorneys’ fees) for violations.

Here are a few tips, wherein a tenant before signing and entering into a rental agreement, has bear in mind and then go ahead.

Background check of the owner: It is essential for one to know the track-record of the licensor and get an No Objection Certificate from the society. One must check, if there is any unauthorised construction done in the house or flat; also, check if there is any litigation pertaining to the property due to which you may land into trouble. It is also necessary to check if the premise has the occupation certificate and regular water supply. Therefore one has to be sure that the document of Leave and License is stamped and registered.

First-hand experience of the site:  Once the landlord has agreed to let the apartment on rent, the tenant must make sure to inspect any pre-existing damage before signing a rental agreement. If there is anything that the landlord has not agreed to fix from the first visit inspection such as tainted carpeting, broken blinds or missing tiles, the tenant must make sure this damage is documented in the agreement as pre-existing. By documenting such damage, a tenant is protected from impending charges to your security deposit.

Make a concrete agreement: Some rentals are inclusive of utilities like cable connection and parking within the monthly rental and some aren’t. This can have an effect on the monthly budget and make an otherwise affordable apartment, not so affordable. Most rent agreements are based on a parallel template, but words can vary between two contracts. Non-specific agreements can imply trouble and may leave out special requirements like extensions, move-in and move-out dates, and damage limits. A tenant has to always make sure that the agreement unambiguously declares the address of the property, the name of the landlord, contact information for the landlord and maintenance persons, deposit and rent total and expected utilities.

Terms and conditions implied: A tenant has to ensure the appropriate documentation is registered. Review the agreement thoroughly to make sure that it includes a lock-in period, release clause and is clear by way of any annual increments to the rent.  tenant should also understand any additional charges that could be their responsibility during the rental period. A tenant should also ensure that they take the metre reading of the electric and gas metre on the date of possession; charges to be levied in case of repair or damage and clarity on timeline of payments and other monetary exchanges.

Understand local and state laws: A tenant has to essentially look out for illegal clauses and keep a track of late payments and penalties. Laws vary from state to state; what may be legal in one state may not be in another. Two very important documents that should be read completely before renting are: the rental agreement and the state’s rental right laws.

Include a severability clause:  A severability clause is the best bet in a rental agreement. This part protects a tenant by keeping the contract intact, even if one part turns out to be unlawful or unenforceable.

 Checklist on pet provisions: Even if advertisements state that some pets are allowed, double check the same with the owner. One should know that landlords are allowed to charge extra for pets. The fees however, may be negotiable.

There are two fundamental things that should always be kept in mind, rent can’t go up until the contract expires, and you can’t be evicted without breaching the contract.

What is conveyance? How do we find if the building for cooperative society is conveyed?

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Cooperative Society, Real Estate, Real Estate India, Real Estate India News, Real Estate Investment, Real Estate News, Real Estate Regulations, Real Estate Society

Conveyance is the transferring of rights, title, interest and ownership of land and building from the land owner and property owner to the purchaser, who may either be an individual or a society or a company.  When it comes to a cooperative society, deemed conveyance, is the provision given by law to a cooperative society to get a proper and legal title in the name of the society in order to ensure that the property is free and marketable. Land is a tangible and  valuable asset and a cooperative society,  should have the same conveyed to itself.

The importance of conveyance for the co-operative housing societies is immense. It gives proper and legal title of the property (land and structures) in the name of the society, which in turn will make that property free and marketable. It enables retention of additional Floor Space Index (FSI) granted by change of development regulations.

It also facilitates the process of funding and raising funds by means of loans for repairs and reconstruction by mortgage of the society’s property is made possible. It also aids in getting permission for reconstruction from the planning authorities.  Additionally, deemed conveyance enables easier approval (for redevelopments) of the property by constructing new building using TDR and members can get the additional area (fungible FSI), new amenities and corpus fund. They can also generate additional revenue from advertising hoarding and telecommunication tower.

A developer is required to convey the land and the building within four months of formation to the society failing which, the land and building is deemed to have been conveyed to the legal body. To bring the same in the revenue record, a competent authority has been designated who will hear the parties on the basis of applications received from the aggrieved party and transfers the title in favour of the legal body by passing the necessary order and deemed conveyance certificate. This will be followed by appointing an authorised officer to execute the conveyance deed in favour of the society and execute on behalf of non-co-operative builder or the land owner.

 

Real Estate Builders lie to RERA about flat possession dates?

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Buildings, Construction, Investment, Property, Real Estate, Real Estate India, Real Estate News, RERA, RERA Act

Real Estate Builders and Developers, are always known for missing deadlines and causing inordinate delay in completion of projects.  But, what comes as a shocker or a bolt from the blue is that they have even started ‘lying’ about the possession dates.  In a project in Lucknow, which commenced in the year 2006, the homebuyers were informed that they would get possession of the projects in three years, however, even as on date, the investors and the home buyers have not obtained possession, despite the lapse of 8 years.  Now what comes as a complete devastating news is that the Builder has quoted to RERA that the completion date of the project would be 2023.  There is a huge gap between the date assured by the Developer of handing over the Flat to the Buyer and the date mentioned to the RERA Authority.

Why are the Developers resorting to this sort of ‘lying’? Doesn’t this defeat the very purpose of the implementation of RERA? What would be the reaction of the homebuyers?  Would they protest like their counterpart Noida? What is the Ministry of Housing and Urban Development, redress this issue?

“The concept of refinancing home loan”​

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Home Loan, House Property, Housing Price Index, Real Estate, Real Estate Advice, Real Estate Investment, Real Estate News

In the present economic situation of falling interest rates, it is an open opportunity for home buyers to minimise their cost of home purchase. The perfect time to purchase one’s dream property at an affordable loan rate. Even the existing home loan borrowers will be able to save large amount of money through refinancing of their loan.

Refinancing can be defined as the process of paying off an existing loan with the proceeds from a new loan, usually of the same size, and using the same property as collateral. It simply means to take a new loan for repayment of your existing loan. The terms and conditions of the new loan should be such which offers an advantageous position or substantial savings to the Borrower as compared to the old loan. For refinancing to be viable, the proposed savings should be larger than the component of cost involved in it. Normally, the refinancing option can be exercised only upon payment of a penalty or fee.

Why refinance?

Refinancing is done mostly for two reasons- savings or modification of deadline for loan payment or both.

When a person swaps the existing loan with another loan at a lower interest rate, then the difference in interest rates automatically make way for savings.

On refinancing, the borrower gets an extended deadline for repayment of loan by undertaking a new loan. Like a person who needs to pay off a loan in near future but does not have the funds for repayment, can refinance his loan. This prevents the Borrower from becoming bankrupt.

Similarly, the extension of timeline can be used for reducing the EMI payments payable to banks.

For some people, it maybe the long duration of loan is a cause of concern. By entering into a loan agreement with new terms and conditions, the timeline for loan repayment can be drastically shortened. This leads to savings in terms of reduction in number of interest payments.

Another reason for refinancing can be to switch from a variable rate to a fixed rate loan or vice versa.

In case of multiple loans, one can use refinancing to consolidate those loans into one single loan especially for an offer of lower interest rate. It also makes tracking of the loan and interest payments easier.

Benefits of refinancing.

1.     Savings: A common reason for refinancing is to save money on interest costs.

2.     Improved cash flow: Refinancing can lead to lower EMI payments due to the extension of timeline for loan repayment. This enables easy cash flow management and addressing of new expenses.

3.     Reduction in loan amount– The loan tenure is inversely proportional to the amount of EMI payments. This means the higher the tenure, the lesser the amount of your EMI payments and vice versa.

4.     Early loan exit– If there is an increase in the cash inflow, one can be free from loan by making larger EMI payments for a shorter loan term.

5.     Modification of loan terms like fixed rate to fluctuating rate of interest or vice versa, to suit the present financial standing of the individual or to meet the present and future expenditures.

6.     Deployment of money into other investments– If you are planning to make another investment, refinancing is a smart move for diversion of funds into other profitable ventures provided you are good at financial planning and management.

7.     Improved credit rating– As the existing loan is paid off before due date, it improves or maintains the credit rating of the individual which is important for securing future credit requirements.

Checklist before refinancing

Refinancing is beneficial. However, there are some factors which need to be taken into account before jumping into the decision of refinancing.

• Transaction costs: Refinancing can be expensive if the closing cost involved in a loan is too high.
• Additional interest costs: Though one enjoys lower EMI payments on an extended loan period, it may actually lead to higher amount of interest payments in totality.
• Lost benefits: Some loans have important features that may go away on refinancing. For example, a fixed-rate loan might be ideal if interest rates are high even if you temporarily get a lower rate with a variable rate loan.

It is important to remember that refinancing should be done only when the aforesaid factors are outweighed by the positive outcomes of new arrangement. Also be mindful of the fact that though refinance conveys alteration in financial management, there are certain ground realities which remain unchanged.

1.     Existence of the same amount of debt or more in case closing costs are involved.

2.     Risk of losing the same collateral security – property in case of home loan, on non-repayment.

3.     Be aware of the new payment structure and its components, to evaluate its long term impact on your financials.

4.     Refinancing your home loan comes at a charge, which differs from bank to bank. Make sure that the profit you make by opting for refinancing is higher compared to the fee and charges you pay. In most of the cases, it is profitable

Refinancing is a calculated move and therefore, one needs to be aware of the discussed factors, in order to reap the potential benefits out of it. In the current scenario of skydiving interest rate, it is the perfect time for refinancing of home loan. From a micro perspective, an individual has to do the required math and proper balancing between payments and savings, to qualify for the advantages of refinancing of home loan.

Private Equity- What could go wrong?

For all private equity investors, the final goal is to realize the return on their investment after a certain amount of time, usually after three to seven years since the original transaction took place. Exit by private equity investors is therefore an imminent aspect of every private equity transaction. Also, the number of successful exits achieved by a certain private equity house has a strong influence on its ability to attract investors and raise funds.

What investors fail to realize is that a full proof exit strategy is essentially what makes a private equity deal score over and above other similar deals. A right exit strategy ensures wealth creation and protection alongwith smooth transition. If the exit plan is weak or uncertain, a good private equity investment plan may turn into a financial ruin. To seize the real deal in private equity, exit strategy should be the foremost consideration.

Accordingly, the potential exit opportunities from an investment plays a decisive role in selection of private equity funds and proposals. This is the reason why exits strategies receive such special attention from the earliest stages of the deal.

Being a flexible financial model, private equity investment offers several exit options depending upon the fund structure and customization by fund managers. The most frequently-used and popular exits routes are presented herein below:-

Initial Public Offering

Initial public offering (“IPO”) method is whereby shares of the investment company gets listed on the stock market for the first time, so the investor is be able to sell its shares to the public. This is one of the most popular exit strategies at times of stable economic conditions as it is likely to enable the investor to realize the highest return on its investment.

However, IPOs also have serious disadvantages compared to other exit methods.

The equity share is exposed to fluctuations and other market risks for a certain amount of time after the IPO is carried out. Additionally, IPO is a cumbersome and expensive process involving compliance of strict regulatory requirements and restrictions.

Trade Sale

Another commonly used exit route is the trade sale in which the private equity investor sells all of his/her ownership rights in the investment company to a trade buyer, i.e. a third party often operating in the same industry. This method is preferred by private equity providers mainly because it provides a complete and immediate exit from the investment. Another reason can be the quick and efficient process owing to a single person transaction with no regulatory restrictions unlike IPO. The investor is in-charge and exercises full control over the whole exit regime and may also be able to recover higher returns through negotiation process.

Trade sale comes with its own set of issues and difficulties. The management of the project may feel threatened due to change in the controlling party and act as a hurdle in completion of the exit strategy. The trader may obtain confidential information during the negotiation process and misuse it, posing a serious business risk.

Secondary Buyout

Secondary Buy-Outs (SBOs) are transactions in which a private equity firm sells a portfolio company to another private equity firm. They are also known as sponsor to sponsor deals.

In this exit strategy, private equity houses appear on both sides of the deal. The private equity firm purchasing the equity investment does so with the intention of value addition to a familiar asset in another private equity firm and utilization of the excess cash available with them.

There are a number of possible reasons why an investor may choose this method as the exit route. It can be a means of shortening the life-time of a transaction in light of the current economic climate or unwillingness or inability to grant finance to the business anymore, even though the company might not yet be ready for a trade sale or IPO. In this situation, selling the company to another private equity firm can be the ideal way to move ahead.

A secondary buyout offers a swift and complete exit for investors which plays a significant role in its increasing popularity.

Leveraged Recapitalization

Leveraged recapitalization is an exit method, whereby the private equity investor is able to extract cash from a business without actually selling the company. This is achieved by changing the capital structure of the company i.e. substitution of the company’s equity with additional debt. Under this method, a private equity company borrows money from a bank or issues bonds or makes use of its own reserves, to repurchase their shares from the investor. The most important advantage associated with leveraged recapitalizations is that the control of the investment is vested in the remaining investors. On the other hand, a leveraged recapitalization may also result in imbalance of capital structure which can lead to financial difficulties and even bankruptcy. A pressure is created on the company’s operations for timely repayment and accountability to debt lending institutions and banks.

The rationale cited by the private equity firms behind preference of this method is the maintenance of control over the enterprise and wilful avoidance of uncertainty prevailing over the IPO market.

From the aforesaid paragraphs, one can understand that volatility of returns in private equity market is largely attributable to the kind of exit strategy one selects. Therefore, adopting the right exit strategy could save you from all the anxiety while going for private equity investment.

IKIA, a research based real estate portfolio management firm in Chennai, was established with the sole intention of promoting, generating and preserving wealth creation by providing competitive financial advisory services to all. They act as knowledge partners and financial guide to private equity investors throughout the deal structuring process including selection of the correct exit strategy, keeping in mind an individual’s investment goal. IKIA specializes in real estate private equity deal structuring and have been successfully advising on the real estate private equity deals since 2012. The five-member research team at IKIA evaluates and analyses primary data collected by them to provide customized solution to investors.

Every investor should approach financial advisory and portfolio management firms like IKIA for leveraging on their financial expertise and to be aware of the wealth creation opportunities in the present economic condition.

Real Estate & Private Equity – Cutting the Right Deal

The biggest motivation behind private equity investment in real estate is the expectation of extra-ordinary returns. In private equity deals, high returns are projected but not assured. Then why should people invest in private equity and not private debt.

Risk appetite, that is the ability to sustain risk, is the deciding factor. An investor with high risk appetite eyeing exceptional returns should definitely include private equity in his/her investment portfolio.

This does not mean that an individual with low risk appetite cannot invest in private equity. Risk appetite being a subjective matter differing for each individual cannot serve as a blanket criteria for investment planning. Anyone with the desire of earning high returns can invest in equity.

Real estate as an asset class is very popular for its inherent feature of capital appreciation and low risk. The lucrative combination of private equity and real estate is not new to investors, what is unknown is the selection of right proposals for reaping the estimated benefits.

Joint venture between Land owners, Developers and Private equity Investors for project construction and development is the current rising trend in real estate sector. The Investor enjoys equity like returns and a low risk profile, the kind of proposal every investor awaits.

Here is a complete checklist of activities that should be undertaken prior to investing in real estate private equity deals (including Joint Ventures) –

1.  Investment strategy

Identifying profitable projects or ventures wherein established and reliable Developers are involved. The Developer should have a clear construction plan along with flexible and suitable financial strategy and provision for back up operations in case of unwanted changes in economic scenario.

An ideal business model should be simple, transparent and practical.

The Developer should have outstanding management team for timely and orderly implementation of projects:

• Experienced and passionate people with a disciplined and execution-led approach
• Cooperative mind-set with due respect to partnerships
• Impressive trackrecord
• High level of integrity
•  Accessible for open communication

2.  Investment focus

Assessment of socio-economic trends, local consumption patterns and supply demand gap on an ongoing basis through macro & micro market research, financial analytics and frequent interaction with industry connections. Adjustment of investment focus on selected real estate proposals in consonance with the observations emanating out of the aforesaid exercise.

3.  Investment Process

• Deal Sourcing and Evaluation

After the first two steps, the participants of the selected real estate proposals are approached for finalizing the terms of agreement. Once all the participants are on the same page with respect to terms and conditions of the proposal, the investor shall evaluate the proposal from all aspects, most importantly legal and financial and request for the requisite data and documents pertaining to the property for the said purpose.

• Due Diligence

If the Investor is satisfied with the proposal evaluation, he/she shall proceed with tax , legal and regulatory due diligence of the concerned property.

•   Deal Structuring

This step is of immense importance as it forms the bedrock of the whole transaction or deal. Structuring a deal involves deciding upon the investment size, entry point, lock in period, risk mitigation practices and other considerations.

•   Monitoring investment

Constant monitoring plan to keep a tab on the project financials is important to ensure control over the investment.

4.  Exit Strategy

For earning the maximum benefit, exiting at the right time is crucial. This step is taken care of while structuring the deal in real estate transactions.

The likelihood for conversion of projected returns to actual returns can be enhanced by signing the right deal and the aforesaid checklist is the key to such right deals.

However, committing to such a rigorous procedure can be arduous for an individual investor. Apart from the time spent on the investigations, application of financial concepts and analysis is also needed to complete the checklist. That’s why real estate financial advisors and consultants play a significant role in real estate investment. The expertise gained from theoretical and practical knowledge involving use of complex financial calculation, data analysis and primary market research alongwith the ability to apply the observations on the current market situations and accordingly designing the deal structure, is what defines a real estate financial consultant.

Therefore, do not hesitate to rely on an expert for adding value to your investment portfolio.

IKIA Consulting Services, a real estate portfolio management firm based in Chennai, pioneers in providing valuable financial advisory services and primary research based reports encompassing project catchment study, absorption trends, price & market inventory trends, regional & socio-economic profile, environmental study, demographic study and other macro and micro trends impacting the investment project. They provide research facilities not only for investors but Developers too like financial viability report, product viability report and risk reports. Further, customized deal structures are prepared in coordination with the dedicated in-house research tea, keeping in mind the objective and focus of the investors. Project monitoring services for ensuring safety of investment also forms part of the services offered by IKIA Consulting Services.

Private equity investments in real estate present you with all the benefits and privileges of an equity investment combined with the risk profile similar to a debt investment. To earn real wealth, one must invest in private equity.

PRIVATE EQUITY- OPPORTUNITIES IN INDIAN REAL ESTATE

Notwithstanding the dull economic scenario globally, India has been and remains a shining spot for investment opportunities. India continues to emerge as an international powerhouse – the world’s largest democracy with the potential to develop into an economic giant.

Private equity funds are investment vehicles that seek equity stakes (partial ownership) in private companies and do not participate in publicly traded securities. They may invest in private placements of securities from public companies.

India has attracted a great deal of attention from international private equity funds eager to take advantage of the significant growth opportunities in fast evolving market. The sustained economic boom seen in India over recent years has led to an array of investment opportunities in private equity. This is evident from the continuous flow of investment capital to private equity funds and the lightning pace of deal execution everyday. The private equity industry in India continues to expand and is becoming increasingly competitive.

In India, the traditional sectors of  private equity investment  are IT and telecoms, infrastructure and real estate. These sectors continue to depend on private equity to bridge the fund gap. Global financial crisis has opened up new target sectors, with funds being deployed towards projects in education, healthcare, life sciences, energy, logistics and microfinance.

Investment interest in these sectors reflects what is essential to India as a developing nation – with its huge need for healthcare provision, infrastructure, modern communications and power generation.

Real estate is one of the fundamental and core sectors of private equity investment. The need for land, a limited and scarce entity, and its efficient utilization is the top priority for a developing economy. The need for residential and office space is a never ending circle. Additionally, India is in a growth phase demanding more space for manufacturing and services industries year-on-year. Urbanization trend coupled with current population pressure are other factors pushing the requirement for increased activity in real estate.

Real estate sector has an immense investment potential and private equity investors are much aware of it. Private equity (PE) investors have been and continue to infuse more money into India’s real estate market which is a sign of their continuing confidence in the long-term viability of this sector.

Lack of research and misunderstanding of the market pulse are responsible for the unwanted and unsold constructions today. Massive inventory issue faced by the Developers is a result of ignorance. This situation could have been safely avoided if timely advise was taken from the real estate consultants instead of blindly planning the projects.

The Developers are aggressively seeking fund since the need of working capital has become a real cause of concern with the dim project cash inflow while cash reserves of the company are getting extinguished in completion of existing projects. Then again, funds are also required for the commencement of new projects.

Private Equity has surfaced as a competitive solution to the dynamic needs of the Developers and real estate market. Large amount of funds can be easily procured by parting with partial ownership of the project, the beneficiary ratio is mutually decided by the parties. The compensation can be in the form of share in project revenue or a portion of the constructed area or both as per the arrangement decided upon.

According to the data from VCCEdge, PE funds in 2015 invested nearly $2.77 billion in real estate projects and companies across 81 deals, against $2.1 billion in 2014 through 90 deals.

For investors, this is an opportunity to deploy capital at attractive risk-adjusted returns in selective profitable ventures. The investor risk is minimal due to right of ownership in private equity deals. The fact that it is a Buyers’ market today cannot be ignored and this is translating into developers being able to get land at cheaper prices, thereby improving the overall economics, marketability and financing of a project.

Commercial and residential projects in recent months have seen some big-ticket transactions. Among residential projects, top developers with a good track record and delivery background attracted investors.

According to a report by Cushman & Wakefield, Private equity (PE) investments in the Indian real estate sector rose by 64 per cent to Rs 19,137 crore in the first six months in 2016 from both domestic and global investors. At the same time last year, PE investments in real estate stood at Rs 11,635 crore.

The residential asset class commanded the largest share of 44 per cent in the total investments during January-June 2016 while commercial office asset class accounted for 22 per cent of the investments. It is forecasted that 2016 could be the golden year recording the highest PE investments in real estate since 2008 at an estimated Rs 43,600 crore.

Real estate investments are spread across a broad horizon, with many offshore investors looking to ink transactions with developers directly through customized deals formulated by real estate portfolio management firms and consultants. Customized deals by real estate consultants offer the advantage of assured maximum return on investment without the hassle of undertaking research and investigation of the investment and projected financial numbers which is best left to the experts.

The attractiveness of India as a real estate investment destination persists because of the viable opportunities for growth and returns, the entrepreneurial drive and innovation of its young population, the promise of a stable and increasingly liberal economy, the faith in real estate as a safe investment asset and the embrace of consumerism that will continue to promote India as an attractive location for private equity investment activity.

Understanding Private Debt

Private debt comprises of those forms of debt financing that comes mainly from HNIs and institutional investors but not from banks. Contrary to publicly listed corporate bonds, private debt instruments are generally illiquid and not regularly traded in capital markets. In UK and the USA, it is an established form of funding and have long been used for growth finance and buyouts.

Private debt has varied forms namely, senior debt, mezzanine debt and distressed debt.

Senior debt refers to first ranking, secured loans used to finance buyout transactions and growth funding. Mezzanine is an intermediate form between debt and equity. It is used mainly for buyouts and growth finance. Returns can be partly through payment of fixed interest at one point of time or on regular intervals or through equity kickers. An equity kicker is a type of equity incentive typically issued in combination with privately placed subordinated or mezzanine debt to improve the return for subordinated debtholders. Equity kickers can have a convertible feature exchangeable for shares or warrants to purchase shares at a set price at some point in the future.

Distressed debt funds are the ones which mostly buy senior secured loans in the secondary market at a discount to their face value. They concentrate on acquiring sound assets in situations in which companies have run into financial difficulties.

FIVE MAIN REASONS TO INVEST IN PRIVATE DEBT :

1. Attractive, stable returns

Private debt offer attractive spreads over sovereign debt, corporate bonds and high yield securities.

2. Low correlation with other asset classes

Low correlation with traditional asset classes provides positive diversification.

3. Risk reduction

Stable performance across all market cycles thanks to combination of different credit strategies.

4. Well-established asset class

The asset class has highly experienced fund managers with verifiable track records and differentiated investment approaches.

5. Short Investment tenure

Generally, the time period of investment ranges between 3 years to 10 years.

A business can finance its operations either through equity or debt. Equity is cash paid into the business by investors and in exchange they receive a share of the company, in effect a percentage of ownership proportional to total investment paid in. The share or stock may appreciate in value in proportion to the increase in the business’s net worth—or it may evaporate to nothing at all if the business fails. Stock appreciation and yield of dividends is what motivates investor to put money in the business but if the business does not earn profit, it cannot pay a dividend. The investor can get his or her investment back only by selling the share to someone else. For a private company, liquidity is an issue because the shares are not traded on the open market and it is difficult to dispose off the share. This is one reason why it is a troublesome exercise to raise money through equity for small and medium sized enterprises.

On the other hand, debt financing is cash borrowed from a lender at a fixed rate of interest and with a predetermined maturity date. The principal must be repaid in totality by the maturity date, additionally provision for periodic repayments of principal can also be incorporated in the loan arrangement. The lender shall have the right to demand back its investment under conditions specified in the borrowing arrangement.

Lending is thus a safer investment option than equity participation, but the amount a Lender can realise through lending option is fixed to the principal and interest charged. Whereas investment in equity is risky, if the company is very successful, the upward potential for the investor may be very attractive but if it is otherwise, the downside is total loss of the investment.

SOURCES OF PRIVATE DEBT :

• Friends & Relatives

Many entrepreneurs begin their enterprises by borrowing money from friends and relatives. This source provides more flexible terms of repayment than banks or other lenders and may be more willing to invest in a new business, based upon mutual trust and relationship.

• Finance companies

Most loans obtained through finance companies are secured by a specific asset as collateral and the lender can seize the asset if the small business defaults on the loan. Commercial finance companies provide small businesses with loans for inventory and equipment purchases and are a good resource for manufacturing enterprises. The drawback of this source is that they charge higher rates of interest compared to Banks.

• Individual investors

Debt finance is a key investment area for individual investors. Individuals with large amount of cash at their disposal look out for debt financing opportunities because of its inherent nature of low risk and stable return. The short span of lock-in-period is also an attractive feature.

Entrepreneurs and owners of startup businesses must almost always resort to personal debt in order to fund their enterprises. Some entrepreneurs choose to arrange their initial investment in the business as a loan, with a specific repayment period and interest rate. The entrepreneur then uses the proceeds of the business to repay himself or herself over time.

The opportunity to earn stable returns at low risk earns it the top place at the index of investments with low risk profile. Its not only the risk factor but the higher rate of returns compared to other low risk instruments that makes private debt an irresistible path of investment.

In real estate, private debt is relied upon by the Developers many a times for seeking project capital. Real estate industry is a capital-intensive industry. The cost for construction of a project, apartment, Building, villa or other structure does not only include labour and raw material cost but also expenses on expert advice from architect, civil engineer, chartered accountant, and other people involved for completion of construction work. Dilution of ownership of companies on non-payment of interest is a big threat for any company and thus, for such large expenditure Developers prefer debt financing. However, the investors can claim preferential repayment of debt amount against all other claims in case of liquidation of the concerned Company.

Private debt is an enviable source of finance, given the competitive interest rate. In the current scenario, customised debt financing solution will become “need of the hour” for capital requirement of startups and medium enterprises. In real estate too, private debt can work as a magic portion for infusing capital into the illiquid market.

P2P LENDING: A PERSPECTIVE AND COMPARISON WITH REITS

P2P or peer to peer lending has emerged as one of the key sources of procuring capital in recent years.

P2P is based on the principle of raising finance from “n” number of people who pool their resources together. There is no proper definition of P2P lending. One can define it as a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. It can be also explained as a financial innovation introduced with an objective to provide funding to people by connecting borrowers directly with lenders through an internet platform.

This system reinforces the power of crowd funding.  The reasons for want of funds can range from professional to personal reasons like commencement of business, expansion or diversification of business, wedding, purchase of property, education fund, etc..

The need for P2P lending structure arose because Banks and financial institutions could not or felt reluctant to grant unsecured and small amount of funds. Although the demand for such unsecured and small funds remains high, moneylenders or individual bankers are the only ones catering to this sector who charge an exorbitant rate of interest being a monopoly.

The working concept of P2P is similar to a marketplace where buyers and lenders meet to enter into a debt financing agreement. This lending structure makes use of technology and online media to maintain communication between the parties, known as P2P platform.

The terms and conditions including the interest rate and duration are either mutually decided by the parties or by P2P platforms with the approval of the parties. The role of P2P platform is to introduce creditworthy borrowers to cash rich individuals who cannot be accessed by the individual borrowers generally.

Lenders make use of Reverse auction model, that is, the lender bids for the rate at which he/she wishes to lend a specific amount of money and Buyer shall have the right to choose among the Bidders, from whom they wish to borrow. Naturally, the lender with the lowest bid rate is preferred by the borrower. Prior to investment, the Lender can verify the credit score of borrowers at P2P platform without any actual interaction with the other party. These platforms have their own criteria’s of assessing the credibility of individuals and may physically verify the personal details of the borrowers. At the time of entering into debt agreement, post dated cheques may be taken from the Borrower to secure the repayment to Lender. All the transactions are made directly through bank accounts of the parties, which ensures that one round of customer verification is done through KYC norms of Banking institutions.

The P2P platform functions in the following manner:

1.      Application of loan by Borrowers is made online on P2P platform.

2.      Next is, evaluation of Borrowers to grant credit scores through data analytics. The method of assessment of borrowers depends upon the policies and practices of P2P platform.

3.      Approved loan requests are then assigned a credit grade, which serves as a platform-specific rating system that reflects a distinct interest rate and affiliated levels of risk.

4.      If the borrower agrees to the terms of the loan, then the platform uploads the borrower’s details onto the online marketplace as a distinct profile for the investors to review.

5.      Multiple investors can invest in a single piece of loan for portfolio diversification and risk distribution.

6.      Once the borrower and investor agree upon the interest rates and other terms and conditions, the agreement is vetted by the P2P platform.

7.      The amount is deposited to the account of P2P platform by the investor which is further directed to the borrower’s account.

8.      The entire process of lending and timely payment of returns is monitored by the platform.

9.      The platform receives a fee on the loan for their services.

The major benefit of P2P is the availability of right amount of fund at the right time. While returns from fixed deposit can never beat inflation and equity returns can never be assured, P2P gives assured and timely risk adjusted returns. No lock in period is applicable here as the returns start at periodic intervals like monthly or bi-monthly payment. These periodic returns can be further reinvested in other investment vehicles or at the same P2P platform for earning revenue at compounding rates. P2P is thus, not only a better source of financing but investment too.

For an orderly growth of P2P lending in India, RBI has recently released a consultation paper on its regulation inviting suggestions from public. Once regulated, more people will start using the platform. At the same time, the fear of overregulation looms over the participants of P2P lending.

As the name suggests, any direct lending from one person to another can be categorized as peer to peer lending. It can be safely deduced that it is not a recent phenomenon but it was the Bank which had replaced such individual financing system in the past.

The revival of P2P lending system can be attributed to its digital makeover. In 2005, Zopa an online platform for peer to peer lending was introduced in UK. Based on this concept, several online platforms came up worldwide.

Within few years, P2P online platforms became popular in Indian capital market as well. At present, around 30 startups are in the P2P lending business.

As goes for any innovation in financial market, there is always a comparison for superior returns. Similarly, the comparison of Real estate Investment Trusts (REITs) and P2P lending by investors is inevitable. Both are new formats of investment capable of investing in real estate. However, there are various factors to look out for before choosing an investment vehicle. Hereinbelow is a snapshot of the differences between the two investment structures:-

 

Growth of P2P lending in real estate is not surprising, given the different client base of this system. The client assessment for P2P lending is totally different from banks and financial institutions as they do not reject borrowers on sole factor of financials and prefer credibility for shortlisting borrowers. Applying this concept to real estate, there is a large segment of medium- income population in need of homes. Banks lend money to this segment only if they give security and agree to a high rate of interest. In such scenario, P2P lending is a boon to the Indian economy.