BackNiche real estate funds back small projects, eye quick exits
Fast deployment of money and quick exits with lucrative returns help niche funds gain a strong foothold
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Bangalore: A new breed of niche real estate funds are gaining a strong foothold in the industry, with fast deployment of money and quick exits with lucrative returns, breathing a new lease of life in small projects that are typically overlooked by larger funds.
In February, Avenue Venture Partners invested ₹ 30 crore in a project by Chennai-based developer Casa Grande Pvt. Ltd. That was the last deal from its maiden ₹ 250-crore fund. It had deployed the entire money in eight transactions over 12 months, including two each with Casa Grande and Assetz Homes Pvt. Ltd.
Chief investment officer Akshay Dewani said while larger funds are stuck with huge deal sizes, boutique funds strike the right balance in terms of team size, affordability and deal sizes. “We have already exited a project of Assetz with 62% returns (on investment) and will be doing more exits in the coming year or so," he said.
Dewani set up Avenue Venture along with Jagannath Shetty, both former executives of Birla Sun Life Asset Management Co. Ltd. The firm started raising its first fund at end 2012.
At a time when real estate sales have slowed sharply and there is a huge need for capital, such niche funds bridge the gap between large private equity (PE) firms and banks, say analysts. While these PE firms typically raise at least $100 million (around ₹ 612 crore today) funds and don’t do deals smaller than ₹ 100 crore, banks have become more cautious in lending to real estate developers.
Niche funds typically invest ₹ 50-60 crore in a real estate project.
Ambar Maheshwari, managing director-corporate finance, Jones Lang LaSalle, a property advisory, said that despite large PE funds and non-banking financial companies (NBFCs) lending to the sector, there is a good market for smaller, niche funds.
“They bring in their own characteristics, maintain small teams and operations tightly, the fee is less and such transactions also enable involved management participation," said Maheshwari.
After the challenge of first-time fund-raising, many of these niche funds are looking at larger second funds and aspire to merge into more mainstream investment themes and geographies. Many of these are also backed by big corporate brands.
Amplus Capital Advisors Pvt. Ltd, promoted by Sanjay Lalbhai, chairman of textile company Arvind Ltd, and other investors, raised ₹ 350 crore last year for deploying half the capital in projects in Gujarat and the remaining in cities such as Bangalore and Pune.
“Fund-raising for the first time is always a challenge and we had a new theme, which was to focus on investing in Gujarat real estate. We like the ₹ 20-40 crore transaction size, where we can churn out capital quickly, invest in smaller projects. We don’t want to put too much money in one project or large projects," said Amplus chief executive Anuranjan Mohnot.
The fund so far has committed only 55-60% of its capital to various projects, but has already started selling its investments. Amplus partially exited an Assetz project in Yeshwantpur, Bangalore, and the returns were beyond expectations, Mohnot said.
For smaller developers who are not present in the top two real estate markets—the national capital region and Mumbai—large funds are tough to tap.
Ben Salmon, chief executive of Assetz Homes, said the investment threshold for a large fund, irrespective of the quality of the deal, is ₹ 100 crore.
“We would like to work with bigger funds but right now we don’t have much choice but to work with local funds, which are professionally run and have clarity of thought," said Salmon.
Maheshwari said it needs to be seen how the niche funds shape up, and if they continue to be small or step up to become larger funds. Jones Lang LaSalle India’s Segregated Funds Group, for example, which has just raised a ₹ 160.75 crore maiden real estate fund, plans to invest in both short duration projects that are in an advanced stage or greenfield projects that will be completed in 24-30 months. But taking a leap from the first fund, it is now planning a new ₹ 600-700 crore fund to invest in office projects aiming to do larger transactions.
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