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As NBFCs Go Slow, PEs Become Largest Source of Realty Funding
The Economic Times  |  April 17, 2019

Kailash Babar Mumbai

In the back of sustained caution among Non-Banking Finance Companies (NBFCs) with their exposure to real estate, private equity firms are emerging as the largest source of funding to developers.


NBFCs had turned aggressive with their lending to real estate sector over the past few years, but had to slow down in the last two quarters, given the liquidity circumstances. While NBFCs are crawling back and have started investing, they are ive with quality and liquidity of assets they are investing in.


The liquidity gap that has been created by NBFCs going slow on investing in new assets has provided private equity players a robust pipeline of real estate project financing transactions. Private equity firms have invested $1.80 billion across 20 deals between October and March, showed data from Venture Intelligence.


“What’s been noticeable in recent months is the rising investments by foreign private equity players like Morgan Stanley and Capital Group as well as domestic players like HDFC Venture, Kotak Realty, and Motilal Oswal,” said Arun Natarajan, founder of Venture Intelligence.


However, given the rise in risk perception and paucity of capital, private equity firms are also filtering their options well before making any financial commitments and this has increased their return expectations as well.


“There’s a good pipeline of deals enabling us to be very ive. We are deploying capital with the strategy of partnering with established developers with execution track record at the land acquisition level. We are staying away from refinance and last mile funding,” said Sharad Mittal, CEO of Motilal Oswal Real Estate (MORE), the real estate private equity arm of Motilal Oswal Financial Services.


MORE has recently achieved the second close of its fourth real estate fund — India Realty Excellence Fund IV (IREF IV) — with commitments totalling Rs 850 crore. Through IREF IV, it has already committed Rs 250 crore in four investments in Chennai, Pune and Hyderabad.


“Institutions with funds in hand have naturally become choosy towards developers having clean track record of debt servicing and project delivery. Further, they are more inclined towards lending to their existing relationships than to new relationships unless the opportunity makes a pressing economic sense,” said Subhash Udhwani, founder of real estate-focused boutique investment bank Elysium Capital, while referring to expectations of higher returns.


MORE’s Mittal also highlighted that the return expectations from an investment have spiked almost 200-300 basis points from around 17-18% that institutions used to expect around a year ago.


Without a doubt, the drying up of funding from the NBFC sector is creating opportunities for private equity real estate (PERE) investors. The number of players beginning to return to making active investments in the realty sector in recent months evidences the trend.


Apart from domestic private equity firms, investments by large ticket investors, including sovereign wealth funds such as GIC and ADIA pension funds like CPPIB and stepping up of the pace by trendsetting foreign investor Blackstone. Interestingly, after pre-dominantly focusing on commercial sector deals in 2017-18, private equity real estate investors are now returning focus to the residential sector.


Even as the liquidity scenario is expected to improve slowly, private equity firms are likely to continue gaining market share over the next few quarters.