Bengaluru: HDFC Property Fund, backed by mortgage financier HDFC Ltd, is set to launch a $500 million offshore fund that it has been planning since early 2016, a company executive said. The fund will invest up to 40% in office spaces and the rest in residential projects with a focus on affordable housing.
This will be HDFC Property Fund’s third offshore fund. Earlier, it raised an $800 million fund in 2007-08 and a $350 million fund in 2014-15, which is in the last leg of deployment.
The new fund, which will make equity and equity-linked investments, has a nine-year fund life and will invest in residential projects, townships and office projects which are in the early stage, greenfield mode. The fund will look to invest in individual projects that are not more than 2 million sq. ft to ensure they are not too large to be developed within a certain time frame. It is targeting an internal rate of return (IRR) of 20-22% and will also look at Hyderabad apart from the other top metros.
“The markets were not conducive to raise offshore money in the last year or so. It was important that we made some profitable exits before we went out to raise more capital. But real estate is on a gradual recovery mode and we will launch the fund in the second half the of year," said the fund executive cited above, asking not to be identified.
Indian real estate funds have been finding it tougher than usual to raise money as investors demand a more rigorous due-diligence process in an uncertain environment and large pension funds and global investors seek exclusive and direct partnerships with developers instead of parking money with fund managers who are essentially intermediaries.
Besides deploying money from the new fund, HDFC Property Fund has been pushing for quicker exits for some time now. Last year, it exited its Rs500 crore investment in Lodha Developers Pvt. Ltd’s project in central Mumbai with almost 3X returns of Rs1,500 crore. Piramal Finance Ltd put in Rs2,320 crore in Lodha’s projects, paving the way for this exit.
From its earlier $800 million fund, the firm has already returned Rs3,100 crore to investors and is gearing up for the balance exits, which will return another Rs2,800 crore. The IRR may be lower than expected, but the fund doesn’t plan to slow down on exits on account of that, said the fund executive quoted earlier.
It also plans to exit another Lodha project in Hyderabad, where it had invested a smaller amount and an IT project of the Embassy Group, which will be part of the various exits expected over the next few months.
“Overseas fund-raising is indeed challenging in the current scenario and the challenge is more when a fund manager is trying to raise an India-specific fund, in which case the past track record specific to India comes into play. However, there is a renewed confidence for India, and LPs (limited partners) are being cautiously optimistic," said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.
“The last few years have seen challenges in exits, which directly impacts the returns that the investors make in a fund. Today, investors clearly look at a fund manager’s track record in its entirety - from quality of investments, to asset management, the relationships built with the portfolio companies and exit performances. A fund manager which has a successful track record of exits and return money to the investors clearly has an edge in raising fresh money," Jain said.