Bangalore: Private equity (PE) fund exits in the real estate space have fallen sharply this year compared with 2011, with limited liquidity in the market, a falling trend in property sales and some funds willing to wait for better returns.
There have been PE fund exits to the tune of $288 million (around Rs.1,578 crore today) in the real estate sector so far this year, down from $457.32 million in 2011, according to VCCEdge, which compiles data on venture capital and private equity deals. This exit value includes mainly full exits and those that are disclosed. (That’s in contrast with partial exits where the fund receives money in instalments.)
While 90% of these exits have happened at the project level, the most common route has been through buy-backs where the developer has repurchased stakes from the investor.
Funds that put money in real estate companies or projects in the peak years of 2006-07 are reaching the end of their investment horizon, and need to return money to their investors, analysts said. But with the development of projects being delayed and realty firms being unable to launch public share sales because of volatile markets, several funds are stuck both at project and at company levels.
“A number of these vintage funds (from 2006-07) would look to exit in 2013, some of them at a low internal rate of return (IRR). Given the overall uncertainties, these funds would look to postpone their exits to 2014 seeking better returns,” said Ramesh Nair, managing director (west) at Jones Lang LaSalle India, a property advisory.
“The quality of exits both in 2012 and in the coming year, would be a mixed bag, with a few duds and some successful ones. We will see more exits in projects that are mature assets because the risk profile is lower,” said a global fund manager, who didn’t want to be named.
“Every exit requires some external source of capital, either debt or equity. While the former is expensive, equity has dried up dramatically,” this person added.
In the absence of liquidity, instances of secondary sales, where one investor exits by selling off its stake to another fund, usually at a much higher price, are getting rare.
Developer buybacks have offered a natural exit, said Anuj Nagpal, co-head, investment advisory, DTZ International Property Advisors Pvt. Ltd.
“In most cases, the developer knows what the value of the asset is, and in the absence of a liquid market where you sell off to the highest bidder, buybacks are a common route now,” said Nagpal.
Some fund managers, particularly the ones who have fared well, are positive about making profitable exits.
Indiareit Fund Advisors Pvt. Ltd has said it has sold about Rs.440 crore worth of investments this year. Managing partner Khushru Jijina said that there will be “more exits in 2013”.
S. Sriniwasan, chief executive, Kotak Realty Fund, said that the fund has seen exits worth around $180 million this year. However, some of these were partial exits from residential projects and may not have been announced.
“Exits will be more next year because developers should start seeing better sales and the overall economic scenario should improve,” said Sunil Rohokale, group chief executive, ASK Property Investment Advisors, which made its first ever exit this year from a project in Noida and got returns of about 2.5 times. “PE funds are raising new capital, so they would also need to return the money first to investors before raising more.”
But not everyone is convinced about a series of profitable exits in the coming months.
For the first time, this year saw multiple legal tussles over exits between funds and developers. Several PE funds have initiated proceedings against developer partners that have sought to impose restrictions on selling stakes in projects or in the companies.
“This was the tip of the iceberg and these issues will get compounded in 2013. The need for exits will accentuate, and if availability of capital remains low, funds will put huge pressure on developers to give them exits,” said a property consultant, who didn’t want to be named.