Demonetisation forces realtors, PEs to renegotiate deal terms

MUMBAI: On December 1, a Mumbai-based real estate developer, who has a luxury project in the suburbs, contacted his investor -a UK-based private equity fund-and demanded that the investor take a haircut in the project, thanks to demonetisation.The developer claimed that the project's viability is at risk and wanted the investor to reduce his internal rate of return (IRR) expectations.

Real estate developers, who had promised anywhere around 25% to 30% returns on investments to PE investors, are now demanding renegotiation of such contracts due to the Modi government's demonetisation drive.

“Real estate developers are claiming that if the contracts (with PE investors) are not renegotiated, they (developers) may not be able to complete the projects,“ said a tax consultant who is advising the UK PE firm on two such investments.

Industry trackers said that going ahead many PE firms may just give in as there is a downward pressure on real estate developers.

In many cases, experts said, even lenders including NBFCs have been approached for renegotiating the lending rates.

“Private equity investors as well as bankers will have to readjust their IRR interest rates in tune with the reality as the current rates may not be sustainable. Many developers will also look to renegotiate with investors and financiers who have lent money ,“ said Rajesh Narain Gupta, managing partner, SNG & partner, SNG & Partners, a prominent law firm.

Experts point out that the PE investors who have insulated their investment in realty projects with strong clauses in investment contracts are also looking to renegotiate.

“The problem is the developer is claiming that if IRR expectations are not altered, he may not be even completing the project,“ said the tax consultant.

Also, there could be an additional problem for investors as they would not like to take charge of the project, and be categorised as developers themselves.

“PE investors will be wary of taking control projects for execution even if there is such a right under the contract for reasons under RERA,“ said Gupta of SNG & Partners.Going ahead, many PE investors and even lenders could end up renegotiating their contracts with real estate developers, said industry trackers.

“This was bound to happen becau se the cash flow is not there to service the debt and the perceived security cover is also getting diluted owing to slower sales in the current context of demonetisation. Hence, developers will be forced to sit with lenders to seek moratorium or get rate reduction or get a top-up,“ said Amit Bhagat, CEO & MD, ASK Property Investment Advisors.

While builders are seeking a cut in interest rates on their structured and mezzanine financing deals, lenders are not warming up to this idea.Rather than reworking returns on such deals, lenders are pushing to offer moratorium, or extend tenures of these structures.