Friday, September 29, 2006

Allow foreign venture capital into realty?

The traditional way of funding real estate is through borrowings from commercial banks and housing finance companies. Such borrowing accounts for more than 60% of all institutional real estate investments, and is growing at over 100% per annum. Recently, RBI has expressed concern at the pace of growth of banks’ exposure to real estate. Thus the regulator has raised risk weights on such loans and has introduced provisioning requirements for real estate exposure. That has made bank lending to real estate developers difficult.

Therefore, the emerging trend is financing of real estate through private equity and Real Estate Venture Capital Funds (REVCF). They normally bring in fresh equity that is difficult to arrange and more expensive. Second, the venture fund works as a partner in the project, thus assuming project risks along with the developers. Thirdly, with the introduction of REVCF, the leverage potential of the projects also goes up. Increased transparency, better governance, adherence to time schedule for exit options as funds have commitments to their investors are other benefits of venture equity funding.

Hence venture capital – whether foreign or Indian needs to be given encouragement.