Bangalore: As the liquidity crunch eases and realty firms look at big land and property acquisitions again, several of them are floating funds to raise capital.
Real estate firms such as Ackruti City Ltd, Kolte-Patil Developers Ltd, K Raheja Corp. and Shapoorji Pallonji and Co. Ltd are either setting up or revisiting plans to float funds they had shelved during the economic downturn.
These funds work on lines similar to those of private equity (PE) or venture capital (VC) firms, with investors putting in money and taking back returns within a stipulated time.
Game plan:An Ackruti City complex in Mumbai. Its fund will invest only up to 15% in the firm’s own projects. Prasad Gori/Hindustan Times.
But the returns to investors are lower, the terms easier, the risks shared, and these realty funds come in handy when PE investments in realty projects have turned scarce.
Property consultants say developers are again scouting for big land and property acquisitions after almost a year and a half of opting for low-risk strategies such as joint developments.
“There are huge opportunities in the sector, with government land auctions coming up and big redevelopment projects, for which developers need money. Putting in their money would mean getting into a debt trap again,” said Ramnath S., director, research, IDFC-SSKI Securities Ltd, a brokerage. “These funds would also enable them with enough cash in hand to tap those opportunities in case there is another credit squeeze.”
Funds of Ackruti City and K Raheja Corp., both with Swiss investment firm UBS AG as partner, are looking at such deals.
Vimal Shah, managing director of Mumbai-based Ackruti City, said the fund will invest only up to 15% in the firm’s own projects. To begin with, Ackruti will invest Rs400-500 crore in the fund, which is still being set up. “There are good investment opportunities and it’s a good idea to diversify into something that is relevant in the current scenario,” said Shah.
The Ackruti fund, which has tied up with California-based Pacifica Companies Llc, will opt for outright acquisitions rather than partner with developers because that would dilute its brand value, said Shah.
“The problem that will arise with such funds is that there could be a conflict of interest in whether the investment should go to the developer’s own projects or to the development of other projects, from which profits could be extracted,” said a PE fund manager, who didn’t want to be named. “For example, in Ackruti’s case, both Ackruti and Pacifica are developers and have their own interests and there would be an overlap, unlike Unitech, which has a clear mandate that it is raising it for its own projects in Mumbai.”
Unitech Ltd was among the earliest developers to set up a separate fund to invest in its slum redevelopment projects in Mumbai. The firm floated a fund to raise capital for these projects and plans to set up more such funds, two consultants in Mumbai said on condition of anonymity. Unitech has, so far, spent around Rs800 crore on the redevelopment projects. Company officials were unavailable for comment as the firm is in a silent period ahead of posting its quarterly results.
Property consultants say the equity market is not reassuring enough yet for private equity funds to invest in real estate. But with a robust development pipeline and acquisition opportunities, funds floated by realty firms would be handy.
A person close to the K Raheja Corp.-UBS fund said it is “actively looking at assets in large metros”. The fund was announced two years ago but was dormant because of the downturn. “There were at least 50 of us (realty funds) wanting to raise funds then, but now again a few of us are coming back to the market,” he said, but declined to be named.
A consultant with an international property advisory, familiar with developments at K Raheja Corp.’s fund, said the fund is scouting for land parcels, residential properties and distressed assets.
In an email response to Mint’s queries, Shapoorji Pallonji said the company was not in a position to comment now.
Some analysts say some such funds are just a case of twisted corporate financing, but would also be cheaper than raising capital from a PE fund. “We may see more developers floating such funds because other sources of capital are drying up rapidly,” said Amit Goenka, national director, capital transactions, Knight Frank India, a property advisory.