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Realty PEs to execute real estate projects on their own

Private equity (PE) funds in the real estate space are starting to don the developers’ hat. Funds such as Trikona Capital, South Asian Real Estate (SARE) and Yatra Capital have started to create in-house teams that can execute real estate projects on their own.

For some, the opportunity has already arrived. For the funds, the idea is to have better control over their development partners while others are clear that they also want to make the kind of margins that construction offers (25-35%). Apart from the cost advantage, this would also mean a lower dependence on construction companies in a scenario where execution capability bottlenecks are threatening to derail projects.

Trikona Capital, which has over $1-billion investments committed in India, is setting up a development group, which will be headed by the ex-chairman of HUDCO, Dr PS Rana. “There is very little scalability in India. My best development partner has at best developed 5 million sq ft of space,” says Trikona MD Aashish Kalra. Execution is the most important thing, he says.

It is this search for execution that is driving them on to setting up a full-fledged development group within Trikona Capital, which, says Mr Kalra, will oversee all developments, even by their development partners and enhance value. Kalra also sees this is an insurance against partner default too. “If your development partner defaults in any case, you could take control of the project. You can do that only if you know the business yourself,” explains Mr Kalra.

At Saffron Group, which advises Yatra Capital on their real estate investments in India, there is an existing project management team which, says their MD Ajoy Vir Kapoor is being expanded significantly to a 13-15 member team. “This team will add value to the construction partner. There may be an opportunity in doing projects on our own, but not yet,” he adds.

At Trikona though, Mr Kalra does not deny that “we will do our own developments if we are not able to find an appropriate partner for a particular project.” Kotak Realty Fund had recently made an enterprise level investment in Lalith Ganga Constructions. Kotak’s stake in the company has not been disclosed. Lalith Ganga Constructions is a start-up promoted by Kotak Realty Fund along with Girish Puravankara, the erstwhile deputy managing director of Puravankara Projects.

Kotak Realty Fund’s website says: “The said start-up company will be identifying land where Kotak Realty Fund would invest directly and manage the same on behalf of the Fund. The company will be entitled to a project management fee and share in profits over a specified hurdle rate. Kotak Realty Group has an opportunity to create its own real estate company with a highly reputed entrepreneur, who has in the past built a large real estate business and has relationships in Bangalore, Hyderabad, Coimbatore and Pune.”

Though the relationship between the two is not very clear at the moment, a company spokesperson said “that the decision to partner with companies for development depends on location to location. The startup though will be executing some of Kotak Realty Fund’s projects.”

“The funds have realised that there are good margins to be made in real estate development,” explains DTZ investment advisory director Ambar Maheshwari. The margins in development in India are in the range of 25-35%. In its investments, SARE wants to have the flexibility to either invest in a project of a developer (and mostly take a majority stake) or execute the project themselves. The fund has developed suitable development capability and is already executing a project on its own in India.

“There needs to be a degree of control over your projects. We also believe that there is a development margin to be made here and that will now come to us,” says Sunil Agarwal, chief development & acquisition officer at SARE. SARE has $200 million committed across several projects in India.

Angel Broking real estate analyst Shailesh Kanani says that if these funds are able to execute and manage these projects, it is a good move. “Over the years with even subcontractors becoming big and their order books swelling, execution is a huge hurdle for large and small real estate companies alike,” he adds.

This might be the reason funds are looking for execution capabilities apart from the fact that they can save costs and boost their margins. Infinite India Investment Management is also doing a project on its own but they are not looking at getting into full-fledged development.

“In one of our projects where we own 100% we are doing the development on our own because we have the capability and also because the asset is very prime,” says the fund’s director, Jagdeep Pahwa.

Source: Economic Times

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