The QIP way to raising funds

Indian realty players may be acting on cues from their global counterparts.

News of realty companies raising money through institutional placements has been a market trigger for the run up in some realty stocks in recent weeks. While fears of a liquidity crunch have abated for realty developers, the challenge of servicing the restructured debt remains. Much of the money flowing from new project launches made by developers is likely to be spent on this.

Will the developers be left with sufficient funds to execute these new projects? It is perhaps with the idea of bringing in more cash to kick-start work in new launches and meet working capital requirement that corporates are now eyeing the QIP (Qualified Institutional Placement) route to raising funds.

With banks, leave alone equity investors, wary of funding the developers until recently, how are Indian developers suddenly encouraged to make qualified Institutional Placements to raise capital?

Besides the fact that developers have addressed their liquidity issues, providing comfort to equity investors, Indian realty players may be acting on cues from their global counterparts.

Real Estate Investment Trusts globally have received a sudden infusion of equity in the last couple of months. Mr Brad Case, Vice-President for research at the National Association for Real Estate Investment Trusts is reported to have stated that REITs have raised $11.5 billion through offerings in April and May. This equity infusion suggests that investors may have found the current price points in the realty market attractive enough to take the plunge.

The equity market rally from March lows has lifted REITs as well. An improving credit market and, more specifically, the focus of REITs on reducing debt have been viewed favourably by the investor community. Or so suggests the massive rally witnessed by REIT indices. The EPRA/NAREIT Global Real Estate Index has surged 66 per cent (price returns in USD) from its March lows. More spectacular is the 90 per cent dollar return clocked by its Emerging Asia-Pacific counterpart.

Now juxtapose these events to the local real estate revival and the story-line may not be too different, except for a slight change in the sequence of events. Realty firms restructured their debt, reduced the pressure on their balance sheets, received a thumbs-up from the stock market and are now looking at tapping the equity market through the QIP route.

Now for the link: The global REIT run-up and the equity infusion could opens up two opportunities for local players. One, the bigger ones such as DLF, Unitech or Indiabulls Real Estate can consider listing some of their assets if the appetite for REITs continues to be high.

Two, the REIT money, especially that earmarked for Asia, can find its way into India in the form of investment/stakes in specific commercial projects. Companies such as Ansal Properties, Anant Raj Industries, DLF and Unitech — with commercial space exposure as well — could find money coming in through stake sale in special purpose vehicles or specific projects. However, the QIP route may pose the risk of earnings dilution for players. (Globally too, REIT investors run the risk of reduced dividend receipts as a result of the huge equity infusion). A number of players have stated their intent to use the QIP proceeds to reduce their debt.

While this may ease the pressure on balance sheet, the equity may not really aid speedy execution of projects. For HDIL or Parsvnath Developers, for instance, the equity expansion (if the warrants/QIP plans translate into capital) would be as high as 40-50 per cent. If earnings are unable to catch up, this could result in dilution in the per share earnings of investors.