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As laws and regulations for bank funding get more stringent day by day, raising money through the private equity route becomes an obvious choice for real estate developers

THE inflow of private equity (PE) capital into India's realty sector is on a rollercoaster. Two consecutive quarters in 2012 have painted two different pictures, in stark contrast to each other.

During January-March, PE investments in the real estate sector doubled to Rs 2,100 crore, according to Cushman & Wakefield, from Rs 1,060 crore a year ago. There was also a pipeline investment of Rs 15,000 crore over 12 months, thereafter. The subsequent quarter (April-June), according to Venture Intelligence, which tracks PE transactions in India, has seen investments stoop. PE funds with a focus on real estate have made seven investments amounting to a paltry $162 million ­ across six deals with disclosed values, one-third of the 18 investments during the same period in the previous year, with a cumulative investment of $553 million.

The industry seems to be struggling to unravel the puzzle. While some analysts think that the market for real estate PE funds is rather muted right now, others feel there has been a spurt in realty PE funds. Several PE funds, both international and domestic, are mobilising funds for this sector.

There is, however, unanimity at least on one aspect that all PE funds are engaged in a constant quest to raise and deploy funds in lucrative business opportunities that India's realty sector offers. And as Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield, says, “India has emerged as one of the most dynamic real estate markets in the world. The sector, which saw some upheaval due to global economic slowdown, was able to withstand the pressures and continues to remain a lucrative investment destination offering growth across asset classes.“

Even in Kolkata, which is often considered to be a less matured realty market compared with other metros, there have been inflows of PE funds. “For instance, Yatra Capital has made several investments in Kolkata. Piramal GroupIndiareit Fund Advisors have also created a vehicle for financing in real estate. The UK-based Reit, which is not a PE as such, but falls well within the category of alternative funding, has also made investments in city's real estate space,“ Rishi Jain, director, Jain Group, a realty player headquartered in Kolkata with projects in many parts of the country, said.

According to Jain, the demand and sales are always there and, thus, profitability has never been a problem. “But the laws and regulations for bank funding are getting more stringent day by day. In the absence of banks, PE becomes an obvious choice. The developers are opening up to the idea of alternative financing because banks are becoming difficult to deal with. Since the demand, profitability, and willingness of promoters are all there, the surge in PE funds and other means of financing are bound to happen.“

Ambar Maheshwari, managing director of corporate finance, Jones Lang LaSalle India, has an explanation for why developers are opting more for PE funds these days. He said that as a rule, developers would not prefer PE over bank funding because PE is more expensive. “However, there are value additions that PE investors bring to the table in terms of helping developers with corporate governance, thereby, bulwarking their expansions plans. PE funds also have management systems in place to track the performance of their investments and generally inculcate a lot of discipline in developers. Capital markets are not very well disposed to real estate right now, and banks and financial institu tions have become very conservative towards the sector. NBFCs and PE funds are the only two available routes for developers,“ said Maheshwari.

Typically, funds can be raised in two ways, with own capital and bank financing. Land procurement is a major cost for any real estate project. With the Reserve Bank of India (RBI) guidelines that bank financing cannot be sought for land purchase, and that land bank (agriculture) cannot be used for overdraft/cash credit (OD/CC) limits, bank financing has become severely limited. Adding to that is the fact that real estate is considered to be a `high risk' sector and banks can only take up exposure of 5-15 per cent most of the times. So, the overall effect has resulted in a severe crunch of bank finance to this sector.

The promoters often have to use their own funds to procure land and then approach banks for finance, which is subject to all statutory approvals, which again is a very lengthy and a time-consumer procedure. To source these interim activities and to reduce dependency on banks, developers have to resort to alternative sources of funds. And, that's a reality from the developers' point of view.

But is it lucrative to invest in the realty sector at this point of time from the funds' perspectives as well?

Some PE funds think this is the opportune time to invest because returns offered by cash-strapped developers are more lucrative than before. Most of the investments by realty funds are being concentrated on residential projects where there continues to be a shortage of 25 million homes across the country.

Rajesh Krishnan, managing director and chief executive officer of Brick Eagle (realty fund), said, “The returns offered by develop ers in the affordable residential segment at the moment are much better than earlier.“

Anuranjan Mohnot, chief executive officer of Amplus Capital Advisors, said, “This is a right time to invest because returns offered by developers are better. We are looking at return of more than 25 per cent.“

Amplus plans to invest around Rs 200 crore in residential projects over the next six months. The expectation of better returns has also prompted many firms to seek to raise new funds from investors.

Brick Eagle, a value fund, is in the process of raising $100 million for investment in around 20 projects over the next one year.

“We have already committed around Rs 120 crore in nine projects across the country from our existing fund,“ said Krishnan.

ICICI Prudential is planning to raise around Rs 700 crore in domestic funds for investment in residential projects, while Kotak Realty Fund is looking at raising around $350 million (Rs 1,997.45 crore) for residential projects.

V Hari Krishna, director at Kotak Realty Fund, said that they are looking to raise a $350 million in offshore funds and plan to close it this year. “We are expecting an internal rate of return (IRR) in excess of 20 per cent.“

Amplus Capital, a part of the Arvind Mills Lalbhai group, is looking to raise around Rs 200 crore for deploying in real estate projects mainly in Gujarat, Mumbai and Delhi, among other cities.

According to Venture Intelligence data, Morgan Stanley Real Estate Investment's Rs 500 crore commitment to Supertech's town ship projects in Noida and Cape Town was the largest during the latest quarter. Supertech also attracted a Rs 100-crore commitment from the US-based Walton Street Capital towards the residential towers that will come up at its mixed-use project, Supernova in Noida.

The government of Singapore Investment Corporation (GIC) invested Rs 100 crore to enable listed real estate developer Brigade Group to buy land in Bangalore's Whitefield for developing a premium residential project.

While admitting that there are investors who are focused on deploying funds into real estate private equity, Maheshwari of Jones Lang LaSalle India said the number of these investors has become rather thin on the ground due to prevailing market conditions. The market is hampered by liquidity issues, policy paralysis and dampened sentiments at present.

Also, PE funds which raised funds during the first wave of 2006-08, have not been able to return these funds to investors as yet. The general perception is that these PE funds have not delivered anticipated returns. These investors are now in a wait-and-watch mode to see how the present phase of funds performs.

Every developer, both listed and unlisted, is keen to evaluate PE opportunities. As the market remains tough, PE funds, with a focus on real estate, have become very selective in terms of developers and projects. The developer's market performance, accountability and delivery record as well as the overall viability of the project are all vital for securing PE investments. (With Inputs from Jharna Mazumdar in Mumbai) ritwikmukherjee @mydigitalfc.com Change in preference During January-March, PE investments in the real estate sector doubled to Rs 2,100 crore, from Rs 1,060 crore a year ago The developers are opening up to the idea of alternative financing because banks are becoming difficult to deal with With RBI guidelines that bank financing cannot be sought for land purchase, bank financing has become severely limited Also, real estate is considered to be a `high risk' sector and banks can only take up exposure of 5-15 per cent most of the times PE funds have management systems to track the performance of their investments and inculcate a lot of discipline in developers With demand, profitability, and willingness of promoters, surge in PE funds and other means of financing are bound to happen