As lenders and borrowers in India grapple with heavy debt levels, asset sales have been a strategy used by conglomerates to reduce leverage.
An aspect of asset sales that needs further focus in India is for corporations to realise that monetization of infrastructure assets in India or selling real estate can be a potential alternative to tapping the capital markets. This "unlocking of real estate value" need not be limited only to distressed borrowers, but should be deemed as an appropriate financial strategy from an efficient capital allocation perspective by the corporate world.
Corporates that have significant real estate holdings such as those engaged in retail (Aditya Birla Fashion & Retail Ltd.), hospitality (ITC) and healthcare services (Wockhardt Hospitals), amongst others, need to clearly demarcate the value of the business that they derive from their core activity vs. the value they derive from their real estate portfolio.
For example, a hospital chain can use a Real Estate Investment Trust (REIT) structure to monetize its property assets to pursue further growth, assuming that capital raised through the REIT is cheaper than issuing debt or equity.
Real estate sales can add substantial value to banks which have high NPA (Non-Performing Asset) ratios, especially those which stand at more than INR8 lakh crore, as per an estimate by CapitalinePlus. Most public sector banks (PSBs) hold properties with market value running into thousands of crores. These banks need to work with cash-rich asset buyers to do a transaction where the bank sells the asset to the prospective buyer and then leases the asset back for use. This financial transaction will allow the bank to use the sale proceeds to infuse capital into its own balance sheet.
Such capital infusion strategies have been used in more developed markets such as the US to unlock real estate value. This assists the bank to create a more efficient balance sheet and focus on its core business of banking, while the real estate asset is managed by a specialist investor.
In addition, corporates in India must look at real estate asset monetization as an alternative to raising capital through IPOs and issuing debt. By the very nature of the lease payments involved in a sale and leaseback arrangement, there are similarities between real estate asset monetization and debt.
However, it is important to factor in the debt issuance cost vs. the cost of funding through real estate monetization. A corporate may find it cheaper to monetize the value of the real estate portfolio vs. having to either issue debt or dilute equity, especially when credit markets are unfavourable. To further emphasise the importance of real estate asset monetization, we think corporates that have borrowed over the last six years can use this strategy to refinance their debt.
In India, base rates from the RBI have headed lower from 8% in 2014 to the current 6%. For corporates refinancing their debt by releasing capital from real estate sales provides an opportunity to bring down interest servicing costs by over 200 basis points in some cases to reflect the lower base rate.
This will allow corporates to invest in new businesses -- investments which lead to new jobs. This strategy can be used by both distressed and non-distressed companies. The key is for the corporations in India to be able to utilise the value of the real estate portfolio to make the best financing decision.
When each corporation tries to make better financing decisions, capital within the economy finds the best use, which in turn improves economic prospects for the country.
Real estate asset monetization is not without complexities. There can be issues around ownership of assets vs. control of assets, but clear legal agreements at the outset are useful in putting such issues to rest. Nevertheless, real estate monetization is a path that must be actively looked at and pursued in India much beyond it simply being a last resort for the distressed borrower.
Originally Published in Business Standard