India Real Estate: SEBI Asks AMCs To Keep Off Realty Debt

MUMBAI: Capital
market regulator the Securities and Exchange Board of India (SEBI) has told
asset management companies (AMCs) to avoid exposure to real estate debt in
certain schemes. According to fund officials, SEBI has directed asset
management companies to mention a 'negative sector list' in their draft
prospectus, and give an undertaking that they will not invest in sectors
that appear in this list.

According to marketing officials at fund houses, the regulator is "prodding"
fund houses to include real estate in the negative sector list. However,
none of the fund houses ET spoke to, has received anything in writing on the
'negative sector list' or to limit their exposure to real estate companies.
"It is only conveyed to fund houses verbally. The directive to include real
estate in the negative list is happening more in the case of fund houses
that are launching capital-protected schemes," said the investment head of a
bank-promoted fund house.

The marketing head of a mid-sized fund house recently said at a press
conference that it has been asked by the regulator not to invest in bonds
issued by real estate companies. The fund house has also given an
undertaking that the capital protection scheme, which it recently launched,
will not invest in the black-listed sector, said the official. SEBI
officials were not available for comment. An email query to SEBI remained
unanswered at the time of going to press.

According to officials at fund houses, SEBI is worried about the debt
repayment ability of real estate companies, which often take on too much
debt. Also, the regulator is not satisfied with the reporting standards of
most real estate companies. Balance-sheet strength, land bank valuation,
authenticity of titles and project standards and execution are areas of
concern for SEBI. In October 2008, many real estate companies were unable to
meet their repayment schedule, forcing mutual funds to borrow externally to
meet redemptions.

"All regulators, including the RBI, are nervous about real estate," said
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India, a real
estate consulting firm.

"At a broader level, we don't expect any trouble for developers. With
respect to non-payment of debt, we've not seen real estate companies
defaulting in the thick of recession. There was some rollover of debt, but
that was there for a short period. Credit risks have reduced greatly, with
most lenders opting to fund individual projects than capitalising the entire
company," added Anuj Puri.

According to analysts, real estate prices, across cities, have witnessed a
significant appreciation in the recent past. In fact, prices in some regions
have surpassed their highs of 2008. Real estate funding has also been picked
up over the past 11 months. The period between January and August has seen
private equity investors closing 25 real estate deals, totalling $990
million. Developers have raised Rs 1,109 crore by way of debt placements and
Rs 2,225 crore by way of public issues.