Foreign banks, funds exit red-hot real estate

MUMBAI: Wall Street banks and leading international investors who have relentlessly poured money into India’s red-hot properties, have turned sellers. Today, they are looking for ways to unwind the offshore structures created to sidestep regulations that barred foreign loans in real estate.

Close to $1 billion investments were sold off in the early days of the subprime crunch, and $600-700 million are now being hawked around. But there just aren’t enough buyers.

Most of these were leveraged transactions, where large banks and funds borrowed money to buy securities issued by local real estate firms. These securities, masquerading as equity, are debt instruments promising a high fixed return. Global investors borrowed at a low rate abroad to buy these papers.

Thanks to the subprime fiasco and credit woes that followed, there is a de-leveraging of books taking place across markets, where investors are keen to pull out of investments made with borrowed funds.

Banks like Lehman Brothers and Deutsche Bank who had pre-funded investors are trying to sell down the loans. Ideally, they would have preferred to do it over a longer period and at better rates. When contacted, the banks refused to comment.

Besides the subprime crisis, the softening of rates in some of the real estate markets (other than Mumbai) may also have driven investors to pare their exposures. Significantly, such sell-offs can happen without violating the three-year lock-in norm applicable to foreign direct investment (FDI) in real estate.

The lock-in simply means that money cannot move out of India, but it does not stop a foreign investor selling the exposure to another foreign investor in an overseas transaction. Since investors route the money through special purpose vehicles (SPV) in Mauritius, they sell down investments from such SPVs or sell the SPV itself.

Interestingly, local real estate firms are also tapping Indian mutual funds and non-banking finance companies to raise money locally since RBI has made it difficult for banks to lend to builders. The listing of several real estate firms has enabled easier rating for short-term debt instruments.

These instruments are placed with MFs. Alternatively, finance companies which give loans to property firms quickly securitise these loans and the securities (better known as pass-through certificates) issued in the process are purchased by other domestic investors, including MFs.

As far as foreign investors are concerned, it is too early to say whether the foreign investment in real estate will slow down significantly. But to the extent there has been de-leveraging, it already has. But given the interest differentials between the US and Indian markets, there will always be some hedge funds, property funds and funds who will buy into quasi-equity securities. But the flows may not be as robust as it was a year ago.