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
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.
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.“
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.
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.
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.“
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.
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.
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.
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