India-focused Realty Funds Eyeing $5.3B; Would They Hit Jackpot?

A slew of Indian real estate-focused private equity firms are gearing up to raise close to $5.3 billion, either in fresh funds or in follow-up funds, according to VCCircle estimates. This suggests a revival of fundraising plans by investment firms who lay quiet after the slowdown hit the realty market in 2008. However, analysts say that in spite of many successful exits recently, the going would be tough for fresh fundraising and only one-fourth of the estimated amount would make it from the drawing boards.

The list of investment firms looking to scoop up funds includes a mix of big players like J.P. Morgan Asset Management, HDFC Property Fund, ASK Property Investment Advisors, ICICI Venture, IndiaReit and Kotak PE, as well as smaller peers like Azure Capitalv, Triangle Real Estate, Paracor Capital Advisors and ArthVeda Fund Management.

Some of the bigger fund houses are eyeing the $500 million mark, which has also become the sweet spot for sector-agnostic private equity funds in India. Most recently, Red Fort Capital announced raising its new fund with a similar corpus, one of the largest funds raised by any realty-focused funds since the global financial meltdown of 2008.

Ambar Maheshwari, managing director (corporate finance) at international real estate consultancy Jones Lang LaSalle India, says, “New money is very tough to come by and international money is very tough to raise in the present market. Only those with domestic track record will be able to raise money.”

Indeed, private equity fundraising climate is not at its best right now, given the mixed picture in terms of past returns and a slowing economy in India, with a high interest rate regime. But fund houses could be betting on appetite for capital by property developers who are laden with debt and would be eyeing a positive spin-off from expected demand boost in the coming years as the general consensus is interest rates have now peaked out.

ASK Property Investment Advisor is another fund house looking to raise Rs 1,000 crore for a new fund. According to Sunil Rohokale, MD & CEO of ASK Property, “During the last three years, close to Rs 5,000 crore has been raised in the domestic market. There is an immense need for capital for developers and bankers are not the preferred choice. Also, over-leveraged developers want money to offload their debts. Even if $1 billion is being raised, it’s a huge amount of money for the real estate sector.”

In fact, large developers are sitting on huge debt piles. DLF Ltd, the country’s largest property developer in terms of market capitalisation, has debt of over $4 billion. So fund houses could be looking to pitch in and take exposure in some of the new projects to bail out the developers facing a fund crunch.

A senior realty consultant who has spoken on condition of anonymity, points out that several funds, out to raise international money, have returned with none or with the bare minimum. This could be due to the fact that a lot of funds raised overseas had not been able to pay off their investors as promised during the heyday of 2006-2007.

“Some of the big players have also been shown the door. Markets are still very tight and nothing has changed overnight so that the environment would be conducive enough for these funds to raise so much money. Only global banks are able to raise close to $100-350 million,” he adds.

Although realty consultants remain sceptical, fund houses are optimistic and most of them are looking at raising specific purpose funds like pure residential property investment fund, rental yield fund and redevelopment project fund, to name a few.

IndiaReit, one of the realty-specific funds in the country promoted by billionaire Ajay Piramal, and Bangalore-based Azure Capital have zeroed in on raising a rental yield fund and redevelopment housing project funds, respectively. ArthVeda Fund Management is also planning to launch funds dedicated to middle-income and low-income housing projects.

Shailesh Ghorpade, MD, CIO & CEO of Azure Capital, says, “We are looking at a rental yield fund because it guarantees returns on a monthly or a quarterly basis for investors.”

According to a research report by Enam Securities, real estate developers prefer private equity funding over expensive debts. The most favoured route for funds to invest money is through structured debt at an internal rate of returns (IRR) of 22-25 per cent. Although borrowing rate from bank is much lower at 12-16 per cent, developers are choosing PE sources due to flexibility of servicing and repayments.

Not surprisingly, private equity funding in realty projects was up at $1.3 billion during 2011 as against $1.1 billion during 2010, according to VCCEdge, the financial research platform of VCCircle.

Property developers say that with the inflow of money in the sector, more deals would happen on the equity side than debt-structured funding, which has become a norm in the real estate industry in the past three years.

Last month, IL&FS Investment Managers acquired 9.4 per cent stake in a subsidiary of the Mumbai-based realtor IndiaBulls Real Estate, which is developing the Bharat Mill project at Lower Parel. IL&FS PE invested Rs 200 crore for the stake in one of the rare equity deals in the real estate space.

Ram Shriya Yadav, CFO of Mumbai-based developer Orbit Corp, says, “I think we will now see a paradigm shift from what has been happening in last 4-5 years and more deals will start happening on the equity side than debt or mezzanine-structured funding. It is a new way of looking at it.”

Orbit Corp is looking to raise close to Rs 500-700 crore through private equity infusion.