March 2007
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Private equity to power realty firms

Real estate developers are increasingly looking at private equity firms as banks are turning off the taps due to the Reserve Bank of India’s stringent guidelines on funding commercial and retail developments.
 
In the first two months of 2007 alone, nearly Rs 1,500 crore worth of private equity deals have been forged by developers all over the country.
 
Industry sources estimate that as much as $4 billion (Rs 18,000 crore) could have been invested in domestic real estate by private equity players this year. Of this amount, $2.4 billion was invested in the last year alone, says Mridul Upreti, head – capital markets, Jones Lang Lasalle, a real estate consulting firm.
 
“In fact, deal sizes are expected to be double that of last year’s, especially in entity level investments. This year average deal size is pegged at $250 million as against last year’s $100 million,” Upreti said.
 
Said a fund manager with an Indian realty fund, “Another reason why developers resort to private equity funding is that these funds offer assistance even in the early stages, including for land acquisitions. Banks step in only at the construction stage. As more and more developers get into large-scale land acquisitions to attain the scale of operations that is financially viable, they will have no recourse but to come to PE funds.”
 
The largest of the deals till date is the 10 per cent stake that Morgan Stanley picked up in Mumbai-based Oberoi Constructions for Rs 675 crore in January. Citigroup committed Rs 135 crore in Bangalore-based Nitesh Estates’ hotel project with a commitment to invest a similar amounts in four more projects.
 
Mumbai-based hotelier Shahid Balwas has sold a stake to US-based private equity fund Trinity Capital to fund his upcoming five star hotel project in south Mumbai for an undisclosed amount.
 
Emaar-MGF, the Delhi-based joint venture between Dubai’s Emaar group and Delhi’s MGF group, is in the process of making a pre-IPO placement with the Deutsche Bank for an undisclosed amount.
 
Indian developers are also looking to raise as much as $2 billion from the Alternate Investment Market (AIM) of the London Stock Exchange this year, industry analysts said. Lining up investments are builders like Surrender Hiranandani of Mumbai.
 
India Bull has already raised Rs 1,200 crore from AIM in January this year, through its wholly owned subsidiary De Properties. Hiranandani is expected to raise Rs 500-600 crore. Other Indian real estate investors on the AIM include Unitech, the K Raheja group and Niranjan Hiranandani.
 
Said Anuj Puri, CEO Trammell Crow Meghraj, “This year we will see a lot of PE activity in Indian real estate as the banks have begun to reduce their exposure to real estate sector as RBI is making lending norms more stringent. Funding by private equity players and listing on the alternative markets like London’s AIM are becoming attractive for Indian real estate developers.”
 
Added Kumar Gera, chairman of the Confederation of Real Estate Developers Associations of India, “The RBI becoming stringent means that debt is now difficult for developers to access, so more of them will look at external equity participation and the PE route is a definite possibility especially on a project by project basis.”

Source : Business Standard

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