Market drying up, low liquidity, skyrocketing interest rates, high inflation, real estate company margins declining, lack of funds etc are news we are hearing daily these days. The scenario is very glum and more so for real estate companies who have been marked down by over 50% in the stock markets. If the liquidity crunch is so high, where are they getting money from.
On talking to a number of experts in the real estate, I have discovered that a number of companies are tapping the Islamic capital. Islamic funding is available from deep pocketed West Asian investors who are sitting with trillions of dollars to invest in high growth assets. However, unless the money is used in a Sharia compliant manner, they are not ready to give the money even if one promises them a 100% return.
Financing based on Sharia, or Islamic Law, requires that gains be derived from ethical and socially responsible investments, i.e, should not be in liquor or cigarattes etc. Moreover, they frown upon interest based banking. Money is available at less that 5-6% from these HNIs who are sitting on a pile of cash.
Banks have scaled their exposure to real estate and have refrained from lending to real estate developers and have increased their interest rates sharply. Equity and bond markets have fallen by the wayside as markets have plunged. Private equity funding come with a large number of clauses that leave the developer with little or no profit.
Some of the real estate developers like Unitech and DLF have been looking to establish fund businesses. But there are issues with investors about potential conflicts of interest if a developer manages its own fund. In India, friction has risen because developers want to sell land at market prices for an instant profit whereas investors, saying that they want to share the risks and rewards, want plots to be injected at a lower acquisition value.
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