The Indian real-estate market is expected have access to about $10 billion (Rs41,000 crore) in private equity (PE) funds this year, which should help cash-strapped developers overcome conservative lending by banks, stricter rules for placements before share offers and tougher guidelines for overseas borrowings.
Estimates range between $12 billion at the top end and $8 billion at the lower end of the range, according to a Mint poll of five analysts, making it way over the $2.5 billion invested in the property market last year through PE deals.
A 30% leap in real-estate prices in a year, fuelled in part by speculative buying, has led to the central bank warning lenders against excessive generosity to developers. And, with overseas commercial borrowings restricted to 100-acre townships, funding for smaller projects is challenging.
“Earlier, there were not many deals”, because developers had more funding options, Siddhartha Gupta, an analyst with Macquarie Research, said. “Real-estate funds will look at an investment of $10 billion this year.” This is the best time for PE players to enter the real-estate market, Gupta added.
Knight Frank, a real-estate consulting firm, expects about $12 billion of investment in the sector over the next 12-15 months through a mix of venture capital funds, PE funds and foreign direct investment. Several real-estate funds such as Royal Indian Raj International, Blackstone Group and Goldman Sachs Proprietary India Fund have already allocated $10.57 billion for investment in the sector, a Macquarie Research report, said.
Real deal: Much of the demand and opportunity for private-equity funding is likely to come from the smaller players.
For companies, PE is a perfect solution since they can raise large amounts of money from such funds without going through a similar kind of due diligence as in the case of initial public offerings (IPOs).
The Securities & Exchange Board of India (Sebi) has just tightened the norms for developers wanting to list and said that such companies must only include for valuation purposes the land they fully own. Sebi has also said that all firms making an IPO have to be rated.
“Banks are lending to diversified companies or well-established groups with interest in real estate,” Nitin Gupta, analyst at PricewaterhouseCoopers, said. “They are lending based on their relationship with their client.”
PE funds on an average make a pre-tax return of 25-30% from their investments in projects. “There have also been cases where the returns have been as high as 60-80%. But this is not sustainable,” Karthikeyan S. of Real Estate Intelligence, a firm that tracks investment in the sector, said.
Just two weeks back, Wachovia Corp., a large US-based diversified financial group, invested about $57 million in Vipul Ltd, a Gurgaon-based real-estate group, for buying a 15% stake.
“We were considering a lot of options such as qualified institutional buyer route, private equity, alternative investment market. We decided to go in for private equity since it suited us best,” Raj Kaushik, chief financial officer, Vipul Ltd, said. “We wanted a strategic partner and since Wachovia is an international player, we chose to go in for private equity investment.”
“A lot of real-estate developers are not IPO-ready. They do not have a clean balance sheet,” said Karthikeyan. “As private equity players invest in special-purpose vehicles created for real-estate projects and not the company, the amount of due diligence done is far less,” he added.
Indian rules allow overseas funds to invest in developments that are built from scratch, and some funds choose that because it involves less due diligence—it is project-specific and not company-specific.
Because of archaic laws on ownership of land, developers hold a lot of their properties and transact on them through a maze of associated and partner companies, which makes it tougher to determine the true worth of a firm or an asset.
That, in turn, has led to some conservative funds holding back their investments. “How much of this amount will actually be invested this year is anybody’s guess,” Gupta, said of the estimated $10 billion in funds waiting to invest.