Emerging Trends in Real Estate Finance

The global financial crisis of 2008 altered the landscape for real estate finance in India.
“Return maximization” is no longer the fundamental investment strategy. Post the emergence of
“risk-minimization” as a focus area, investment structure has drifted from unsecured equity deals
towards debt deals. Furthermore, developers are scouting for fresh sources of financing to
mitigate the liquidity crunch faced by them. This has accelerated the process of
institutionalization in Indian Real Estate sector due to developers’ prompt willingness to leverage
opportunities available in the financial market instruments like IPOs and QIPs.
Jones Lang LaSalle Meghraj’s latest research report, Emerging Trends in Real Estate Finance,
explores the trends and challenges in different channels of financing real estate development in
India. The report establishes the importance of real estate as an investment avenue and
investigates the stakeholders’ strategy to obtain financing for continuing a high growth story of
this sector in recent years. The report also articulates the need for clear policy guidelines for
REMFs, REITs and FDI necessary for sustainable growth of the real estate sector in India.
The summary of the report:
• Real estate has established itself as one of the high-growth sectors in the Indian economy.
In 3Q09, investment grade real estate was valued at USD 768.28 billion*, which was
equivalent to 63% of the total market capitalisation of the Indian equity market.
• According to estimates, the Indian real estate sector will require additional USD 23.66
billion for the construction of undertaken commercial projects and to fulfill the unmet
housing demand. While sources of funding have become scarce in the aftermath of the
2008 global financial crisis, there are some emerging channels of real estate financing in
India, which are likely to help the sector continue its high-growth story.
• Gross bank credit to the real estate sector surged to USD 19.7 billion in FY09 from USD
13.6 billion in FY08, registering a growth of 44.6%. Real estate still accounts for less
than 4% of the total bank credit creation.
• Contrary to the commonly held belief of capital flight occurring during 2008, the actual
deployment of FDI into India’s real estate sector increased 29% y-o-y during FY09.
During FY06–FY09, FDI into India’s real estate sector registered a CAGR of 193% and
witnessed an increase from USD 38 million in FY06 to USD 2.8 billion in FY09.
• However, new deal announcements for real estate significantly slowed down in 2008.
This conforms to the overall trend of a slowdown in the private equity (PE) market and is
not specific to the real estate sector.
• Domestic PE players have been focusing on deal structures that are essentially debt but
replicate an equity structure. Investors prefer mezzanine deals, which are structured debt-
like instruments consisting of interest income and an equity-linked component.
• To date, a total of USD 2.76 billion has been raised by the real estate sector in India
through qualified institutional placements (QIPs), and at least another USD 2.45 billion is
expected to be raised by many other real estate players in the future, for which these
players have their shareholders’ approval.
• In the coming months, USD 3.31 billion is expected to be raised through property IPOs.
IPOs can be an attractive vehicle to tap domestic, as well as foreign institutional
 investment. Moreover, they provide a good exit option for most PE investors that have a
finite fund life.
• Issues related to valuation and taxation are holding back real estate mutual funds
(REMFs) in India. It is expected that the government will soon clarify these uncertainties
to enable better financing opportunities for real estate development in the country.
• We believe that all channels for financing real estate developments will see enhanced
activity in the coming quarters. However, there are issues related to the transparency of
the sector that must be addressed beforehand to bring about a smooth improvement in the
sources of funding.
* Assumed conversion rate of INR 46.5 per USD
Top of Form

1. Part I: Products

1.

Chapter 1

Global Real Estate Investable Universe Continues to Expand and Develop (pages 1–18)

• Introduction

• Global core real estate universe: $8 trillion and growing

• Why have REITs succeeded?

• REIT proliferation: thriving in 18 countries and counting

• Early growth cycle: only the tip of the iceberg

• Relative risk and return

Lijian Chen and Thomas I. Mills

 Summary

 PDF(1327K)

2.

Chapter 2

The US Real Estate Investment Trust (REIT) Market (pages 19–33)

Summary
This chapter contains sections titled:

• Introduction
 • The evolution of US REITs

• US REITs: creation to 1993

• US REITs: the Modern Era

• The investment performance of REITs

• The future of REITs

Dr Will McIntosh

 Summary

 PDF(572K)

2.

Chapter 3

Progress on REIT Regimes in Europe (pages 34–45)

Summary
This chapter contains sections titled:

• Introduction

• Developments in France: SIIC 2/3/4 and the OPCI

• OPCI: ‘the non-listed SIIC’

• The German REIT

• The UK REIT

• EU law and REITs: what are the issues?

Simon Clark, Tim Hackemann, Olivier Mesmin, Matthias Roche and Tom Road

 Summary

 PDF(94K)

2.

Chapter 4
 Listed Property Trusts in Australia (pages 46–63)
Summary
This chapter contains sections titled:

• Background to LPTs

• LPT regulatory framework

• LPT profile

• LPT performance analysis

• Recent issues in the strategic development of LPTs

• Changing LPT and property landscape in 2007–2008

• Conclusion

Professor Graeme Newell

 Summary

 PDF(253K)

 References

2.

Chapter 5

Asian REITs: Playing the Yield Game (pages 64–81)

Summary
This chapter contains sections titled:

• REIT markets in Asia

• Ways to enhance distribution yield

• Yield-accretive acquisitions

• Conclusion

Joseph T. L. Ooi and Neo Poh Har

 Summary
  PDF(253K)

 References

2.

Chapter 6

European Real Estate Unlisted Vehicles: A Mature Market Now or Is There More to Come? (pages

82–99)

• Introduction

• Characteristics of European real estate unlisted vehicles

• Performance of European real estate unlisted vehicles

• Management fees

• Discussion and conclusion

Karen Sieracki

 Summary

 PDF(410K)

 References

2.

Chapter 7

Constructing a Global Real Estate Investment Index (pages 100–113)

Summary
This chapter contains sections titled:

• Introduction

• Top down or bottom up?

• Rolling out national market indices

• The first IPD multi-market index – the pan-European

• …and finally the world – IPD's first global index

 Ian Cullen

 Summary

 PDF(353K)

2.

Chapter 8

Property Derivatives: The Story So Far (pages 114–139)

• Introduction

• The history and innovation behind the property derivatives market

• The drivers for change

• Pricing and underlying index activity

• Alternative indices and products being traded

• Has the market achieved the results expected of it?

• How have derivatives changed the market place?

• Future expectations, unintended consequences and lessons learned

• Conclusions

Gary McNamara

 Summary

 PDF(451K)

2.

Chapter 9

Property Markets in Central and Eastern Europe (pages 140–156)

This chapter contains sections titled:

• Introduction

• Development of real estate markets

• Property markets, data availability and economic competitiveness

 • Bank lending on property in central and eastern Europe

• Conclusions

Professor Stanley McGreal, Jim Berry and Alastair Adair

 Summary

 PDF(209K)

 References

2.

Chapter 10

Islamic Finance and Shariah-Compliant Real Estate Investment (pages 157–189)

This chapter contains sections titled:

• Introduction

• Defining SCI

• Shariah funds in the research agenda

• Conclusion

A. R. Ghanbari Parsa and Mohammad Ali Muwlazadeh

 Summary

 PDF(411K)

 References
2. Part II: Processes

1.

Chapter 11

Socially Responsible Property Investment – Background, Trends and Consequences (pages 191–

238)

• Introduction

• Social responsibility and sustainable development – background

• The principles for responsible investment

• Trends and concepts within the property market

• The benefi ts of sustainable buildings and of SRIs

• Criteria and assessment tools

• Realisation of SRPIs

• Implications for property professionals

• Conclusion and recommendations

Prof. Thomas Lützkendorf and David Lorenz

 Summary

 PDF(1233K)

 References

2.

Chapter 12

Corporate Governance in the Real Estate Industry (pages 239–261)

• Introduction

• Reasons for the rising importance of corporate governance

• Existing corporate governance principles for the real estate industry

• Impact of corporate governance on firm value

• Research agenda for corporate governance in the real estate industry

• Appendices

Nicolas Kohl, Prof. Dr Wolfgang Sch fers and Prof. Dr Karl-Werner Schulte

 Summary

 PDF(371K)

 References

2.
 Chapter 13

The Future of Real Estate Education (pages 262–277)

Tony Key

 Summary

 PDF(178K)

 References
2.

1. You have free access to this content

Index (pages 279–290)

 Summary

 PDF(86K)
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