Realty-focused PE funds raise $1.6 billion in last seven months
While investors seem willing to commit fresh funds, capital invested in previous years hasn't yielded the kind of returns that were expected
Mumbai: Private equity (PE) investor Milestone Capital Advisors Ltd plans to raise a ₹ 700 crore fund from domestic investors this year and invest the proceeds in the real estate sector.
Milestone has raised the proposed fund size from the ₹ 500 crore it had been planning to raise three months ago because of a conducive market environment. It is one of the many funds seeking to raise capital with the intention of providing structured financing for the real estate sector, in response to demand for capital from developers and the improving risk appetite from investors.
Based on announcements made since the start of this calendar year, Indian real estate focused private equity funds are looking to raise nearly $6 billion, in addition to $1.6 billion that has already been raised. In 2007-08, real estate focused private equity funds had raised $8.1 billion. Some of the funds that have raised capital or are in the process of doing so include HDFC Property Fund, ASK Special Opportunities Fund, Piramal Capital, Motilal Oswal Real Estate Fund, IDFC Real Estate Yield Fund, Religare Credit Advisors LLP, Jones Lang LaSalle India’s Residential Opportunities-I and India Infoline Wealth Management Ltd.
“The sudden flux of capital is a positive sign and investors are ready to listen to the India story,"said Sunil Rohokale, CEO and managing director at ASK Investment Holdings Pvt. Ltd. ASK Special Opportunities Fund is seeking to raise $200 million, of which it has already raised $50 million, this year. Much of the capital being raised by real estate-focused funds will be invested in residential projects via debt or structured investments which will include both debt and equity components. This has emerged as the favoured route for investors over the last three-to-four years, as payments are made on a quarterly or half-yearly basis.
“Earlier investors were expecting equity returns of 25-30% whereas mezzanine products gives reasonably assured internal rate of returns of 17-20% which further enhances investor comfort to invest in this asset class," said Sumeet Abrol, executive director at Grant Thornton India LLP.
Anuj Puri, chairman and country head at Jones Lang LaSalle India, said investors are currently preferring to invest in real estate debt as the returns being offered are comparable to equity returns, at least for now.
“Today the debt returns offered is closer to the guaranteed equity returns promised by fund managers earlier but going forward after 5-6 months time we see that debt investments will start diminishing and equity investments will begin, " said Puri.
For real estate developers this capital is coming at a steeper cost than debt taken from banks.
“Funds charge higher than bank lending rates which is around 14-16% but banks do not pay for land acquisition or if the developer has already raised loan against a project and needs further subsequent amount of money for the same project. That is why developers are raising higher-cost capital," said Ashutosh Limaye, head of research and real estate intelligence service at property consultants Jones Lang LaSalle India
Another reason for raising costly debt from funds is lack of project sales, said Pranay Vakil, ex-founder and chairman of property consultancy Knight Frank India. “The stress is due to lack of sales and not where funds have been raised for construction finance or to repay debt in some cases. But we expect 2014-15 to be a better year as compared to earlier and sales will start picking up," said Vakil.
While investors seem willing to commit fresh funds, capital invested in previous years hasn’t yielded the kind of returns that were expected. Much of the $8.1 billion raised in the 2007-08 is yet to be returned due to the inability of funds to exit existing investments. “Exits have been delayed due to various reasons including delayed project launches due to environmental clearances, delayed execution of projects. Also due to rupee-dollar foreign exchange scenario, most of the funds had deployed capital at ₹ 45 to a dollar which has been eroded as rupee now stands at ₹ 60, and it hit its worst nine months back." said Vakil.
Some developers have also defaulted on their repayment obligations in cases where investments had been made via debt instruments.
“We have been hearing cases of defaults by developers, they need to understand that just because capital is easily available they should not raise it. In the long term repayments can become problematic; also PE funds need to understand that they need to take equity exposure than being satisfied by giving out debt," cautioned M. Murali, managing director at Shriram Properties, the real estate arm of Shriram Group.
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