Special Investment Regions – New Real Estate Investment Opportunities

Every real estate investor keeps on looking for new opportunities for investments, but often ignores the ones standing right in the front. This post is just to throw some light on one such opportunity.

What are Special Investment Regions?

Most of us know about SEZs and their recent outburst in India, but very few of us are aware of the upcoming prospects being offered by the new development plans of Government of India – Special Investment Regions (SIRs). These are meant to be gigantic projects which spans to the tune of several thousand hectares. Just to show it in a hierarchy:

As is quite evident from the above categorization, the size and extent of SIRs is unmatched. The potential for infrastructure and real estate development in these regions can only be judged by the example of upcoming project - Dholera SIR in Gujarat, India.

Dholera SIR – Quick Insights 

• Total Area : 800 sq. kms: a green field location
• Developable Area: 500 sq. kms.
• World-class infrastructure & connectivity: within & outside
• Central spine express way & Metro Rail to link the SIR with mega cities
• Airport & Sea Port in the vicinity
• Proximity to mega cities: Ahmedabad, Bhavnagar, Vadodara
• Capable to cater to both International & Domestic Market
• Close to Gujarat International Finance TechCity (GIFT)
• Logistic support of the Dedicated Freight Corridor (DMIC)
• Benefits of the high impact Delhi Mumbai Industrial Corridor (DMIC) 

Dholera SIR is a project planned along the Delhi-Mumbai Dedicated Freight Corridor:

As shown in the above map, Dedicated Freight Corridor (DFC) spans through 6 states with a length of 1483 kms:

• Uttar Pradesh-22 km (1.5%)
• NCR of Delhi- 22 km (1.5%)
• Haryana- 148 km (10%)
• Rajasthan- 578 km (39%)
• Gujarat- 565 km (38%)
• Maharashtra- 148 km (10%)

This scale of the DFC offers a lot of industrial, commercial and subsequently residential development along its length. In order to make full use of this opportunity, Gujarat government has initiated a mega SIR project along the DFC – Dholera SIR.

This visionary approach will offer a lot of real estate development opportunities in this region. Some of the planned RealT & infrastructure developments include:

The above representation indicates just few of many possible developments that are going to take place with the upcoming SIRs in India. These are mega projects that require decades to complete and fully implement, hence giving investors ample horizon for investment. Dholera SIR, for instance is planned to roll out in 3 phases:

Closing Remarks: With the announcement of Special Investment Regions, there has been a huge anticipation of investment opportunities among investors. The other upcoming SIRs include the one between Mumbai-Bangalore DFC. RealT Horizon is keeping an eye on these developments, are you??

---- Thanks for reading. Your comments will help us improve our analysis. J ----

Financing the Real Estate by Equity

In our previous post Financing - Funding a RealT, we showed how debt can be used as a vehicle to fund your RealT project. In this post, we will try and elucidate how one can finance projects using equity.

Out of the above 3 ways, top 2 are self-explanatory. But let’s just look at the Real Estate Investors part and REIT in detail.

As can be seen from the above classification that in real estate, there are various investment fund options. Let us summarize each of these with one line explanations: 

Type of Investor
Venture Capital	They invest very cautiously in realty projects by valuing its worth using their models of valuation.
FDIs	Real Estate sector has attracted a lot of FDI in India, but recently the trend has been falling. See figure 1.
Hedge Fund	Though not very popular, but Hedge Funds are increasingly moving into funding the real estate projects.
Insurance Companies	They invest in large projects having high returns for longer horizons which commercial banks generally don’t take up.
Pension Fund	Another new source of financing in real estate. They generally fund through mortgage bankers & brokers.

An analysis of Real Estate FDIs in India

Figure 1: Rising FDI share towards the end

REIT (Real Estate Investment Trusts)

This is an extremely important instrument in the Real Estate Financing as it pools in the investments from various investors and then use this fund to finance the realty projects. REITs is a vast topic in itself and we will share our views on them in our later posts. But just to explain the basic phenomenon of REIT, refer figure 2.

Figure 2: Basic mechanism of REIT formation

Note: We have just touched upon the aspects of Equity financing in real estate, however the details of many of these instruments will be covered in our subsequent posts.

                                                    ----- Keep Reading RealT Horizon J -----

Financing - Funding a Real Estate Project

We got a feedback from some of our readers that our last post Ownership - Holding a RealT was a bit too much complicated to understand for a beginner. Totally respecting their valuable comments, we have tried to mellow down this post on RealT Financing (although the topic is way more complicated than the last one :-/).

What is Financing?

So coming back to the main business, the second level of Value Chain in Real Estate circumference – Financing. Just as you require money to pay for your household items, you need money to pay for your house (realty property) too. But financing a RealT deal is not as simple as buying vegetables down the street! More often than not, realty buyers need a proper plan, strategy and an agency to finance their dream projects. This is where this post originates J

How is Financing classified?

There are several ways in which a RealT deal can be financed. Typically all the ways can be classified under 2 heads – Equity & Debt.

To start with, we will cover the Debt portion in this post and try to explain the various options to raise finance through debt.

Debt

Debt, in literal sense means – “raising money from the market for a particular time horizon, at some interest rate”. Due to the advancement in the financial markets, many instruments have been developed to carry out this function. These instruments, if used rationally can benefit both lenders & borrowers, but improper use of such instruments can even lead to catastrophes like ‘Sub-prime crisis of 2008’.

Bank Loans

Raising money from a commercial bank is the easiest way for an individual investor. Banks offer attractive interest rates to the borrowers and are easily accessible. But this may not be the most effective way to finance a real estate deal due to the following reasons:

• Banks disburse loans for short-term
• The amount of disbursement depends on various factors like – individual’s net worth,  MPBF (maximum permissible bank fund), income statements, securitization etc.
• Indian Banks generally do not grant loans to a new real estate developer
• Banks generally do not grant loans on ‘land’ alone

Mortgages

Mortgage typically means taking loan from a party by pledging your property as a collateral against the loan. The mortgagee reserves full right to take a control over the pledged property in case of foreclosure (default, in simple terms).

Whatever you will read after this point is a bit complicated, but we have tried to simplify the concept as much as possible. Let’s see how much sense it makes. So, mortgages can be carried out in 2 ways:

Mortgage Broker:

The whole idea of Mortgage Broking is depicted in the above figure. Few points about this process:

• Brokers are independent agencies, having tie-ups with fund providers
• Fund providers generally prefer these brokers so that the borrower is already researched for credit worthiness
• Mortgage brokers are generally not involved in ‘loan servicing’
• They don’t use their own capital to fund the borrowers

Mortgage Banker:

These are specialized agencies which provides mortgages directly to the borrowers, using their own capital. These agencies do not accept deposits from the public, rather makes money from the loan origination fees & servicing fees.

They typically packages the loans & sell them to the institutional buyers or government sponsored enterprises in secondary markets. In US, there are Freddie Mac & Fannie Mae to carry out these functions while in India there is no such institution yet for this function. The nearest equivalent that can be thought of is Mortgage Risk Guarantee Fund.

We know that this has become a bit too much complicated to understand, but the following diagram may relieve our brain nerves a bit ;-)

So the whole process of Secondary Markets is depicted in the above figure. It shows step by step process followed by the loans to finally reach the borrower.

Note: We understand that this post has been a bit too much complicated. Please feel free to write to us in case you need any explanations on any of the above topics. The remaining portion of financing by equity will be covered in our next post. Stay tuned!!

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