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PE cos shine in downcast real estate sector

Ajay Sukumaran & Debojyoti Ghosh, Bangalore, The Financial Express

August 16, 2011

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The realty index is down over 12% in the last week, key policy rates have increased many times over the last 15 months, raw material costs are on the upswing as a result of inflation and homebuyers are cautious. In short, the Indian realty mart is shrouded in uncertainty.

However, for real estate developers looking for growth capital, there seems to be a silver lining over this cloud of uncertainty as the sugar daddies of the financial world, the private equity (PE) funds, are lining up multiple investments into key city residential projects across the metros.

Most PEs are channeling their funds into residential projects with ticket sizes ranging between R50 lakh and R1.5 crore.

“We will be closing three to four deals in the next two months, which will be of R75-125 crore ticket size in Mumbai, Bangalore, Delhi and Chennai,” said Sunil Rohokale, executive director, Ask Investment Holdings, which has raised two domestic realty funds of R350-550 crore in the last two years.

The R350 crore fund has already made six investments, while the R550 crore fund, which was raised in the last six months, is looking at mid-size residential projects in Mumbai, Bangalore, Pune, Chennai and Delhi that can be completed in six years. “We are only looking at residential projects of 5-15 acres. Normally of the size of R50-1.5 crore range flats,” Rohokale added.

“It (PE investment) is filling a certain gap, but it is not going to resolve the liquidity issue,” said Anshuman Magazine, chairman and MD of CB Richard Ellis, a real estate consulting firm. “The reason why deals have gone up is that they are getting good opportunistic investments,” Magazine said.

According to Venture Intelligence, PE firms made 15 investments amounting to $504 million across 10 deals during the quarter ended June 2011. The pace of investments was higher compared with the corresponding period last year which witnessed funding of $377 million across eight deals. The largest private equity investment during the June quarter was Warburg Pincus’ investment commitment of over R1,400 crore to Oceanus Real Estate, a 49:51 joint venture with its existing hospitality portfolio company Lemon Tree Hotels, noted Venture Intelligence.

Industry experts say that there is no fresh money coming from FDI with fund raising happening mostly in the domestic PE funds. Besides, fewer deals are taking place in longer gestation projects.

“I would not say it is necessarily a silver lining because PE deals typically happen at a higher rate. But one can structure it appropriately so that it is a win-win for the company and for the investor too,” said Ashwini Kumar, COO of Bangalore-based Nitesh Estates. While the company has funds for its immediate requirements, it is keeping its doors open. “For future requirements, we are looking but nothing is finalised as of now. We are always open to deals,” Kumar said. The company is working on a Ritz-Carlton hotel project in Bangalore, a mall and eight residential projects.

Kumar agrees investors’ bias is towards shorter gestation residential projects, but points out that the absorption rate in the commercial segment in a city like Bangalore, estimated at 10 million sq ft, is substantially higher than previous years.

“Generally, the risk associated with residential projects is perceived to be less. But we have seen money going into mixed use projects and a little bit into retail,” said CBRE’s Magazine.

“There is not much movement in the high-end luxury projects. Super luxury segment is facing the most difficult time,” said Rohokale, adding that there is a slowdown in the R5 crore and above apartment projects in core areas in Delhi and Mumbai.

“You have seen a significant amount of PE funds getting into this industry because those who need capital for growth have no other choice but to go to them,” JC Sharma, MD, Sobha Developers, said. He reckons that more investments are seen in residential projects because they constitute about 75-80% of the market.

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