Private equity (PE) firms are returning to real estate investments through projects rather than equity as an easier exit option coupled with the relatively higher returns from the sector helped them overcome their qualms.
Since late 2008, PE investors have been shying away from real estate investments as a stock market downturn took a larger toll on real estate prices, which were then priced higher than the broader market, resulting in many funds burning their fingers.
“At the enterprise level, private equity in operating companies is a challenge. The exit is through public markets, and the public market is tired of real estate stories. So PE at corporate levels has gone for an expiry now,” V Hari Krishna, director at Kotak Realty Fund told Reuters.
“At project levels, exit is easy. Even in the residential sector, the exit is easy once the apartment is sold,” he said.
In February, Parsvnath Developers said it was looking at raising 2-3 billion rupees by selling stakes in projects. IL&FS Milestone Fund in June acquired a 74 per cent stake in HCC's business complex in suburban Mumbai.
IL&FS Milestone Fund is a joint venture between IL&FS Investment Managers and Milestone Capital Advisors.
Earlier this month, Krishna's Kotak Realty Fund, a unit of Kotak Mahindra Bank, invested 2.5 billion rupees in Emaar MGF's – a JV between Indian lender MGF and Dubai's Emaar Properties – two projects.
“There is better control due to a single project or limited number of projects and, being board-run, all resolutions can be monitored…,” Lalit Kumar Jain, Vice President (West) of industry body Confederation of Real Estate Developers' Associations of India (CREDAI) said.
Investors also appoint directors on boards of special purpose vehicles, through which companies execute projects, he said.
PE funds, including Kotak Realty Fund, Citigroup, IL&FS Investment Managers and ICICI Venture, part of Bank have a total commitment of over $10 billion for Indian real estate sector, Hari Krishna said.
HIGHER RETURNS
“A PE investor (in real estate) expects somewhere between 16-17 per cent to upward of 22 per cent,” Ackruti City Managing Director Vyomesh M. Shah said, adding that actual returns vary from project to project.
This is higher and much more risk free than equity investments, says Ramesh Jogani, managing director of Indiareit Fund Advisors, the real estate arm of Piramal Group. The benchmark index of the Bombay Stock Exchange returned 14 per cent in 2010.
“It's a tangible investment and the underlying asset is property. Even if prices go down, you won't lose much on capital,” added Jogani, who manages a real estate focused fund with a corpus of 30 billion rupees.
For the property firms, the money from PE funds is typically useful in the land acquisition stage as banks and other lenders are available to fund the actual development of the project.
Property majors like Brigade Enterprises, Ackruti City, DB Realty and Jain's unlisted firm Kumar Urban Development Ltd are among others scouting for PE investments in projects.
“The PE investments mainly come in at the initial stages of the project, and would facilitate the funding requirements for constructions. Once the projects are sold off, possibly in 18-20 months, PEs would make an exit,” Abhinav Bhandari, analyst at Elara Capital said.
“This would hold true, assuming that the projects are being build on a sale' model and not on lease model,” he said, adding, “PE investments in projects would help in speeding up of execution as most real estate firms are restraining from raising funds from the market,” Bhandari said.
Source: Business Standard