Bengaluru: Residential property developers are finding a larger chunk of equity capital coming their way as private equity (PE) funds are loosening purse strings after four years, during which time debt and structured debt deals dominated transactions.
In a post-RERA or Real Estate (Regulation and Development) Act scenario, real estate firms are likely to be in greater need for early stage equity capital which is patient money willing to partake of risks along with developers. This money will, however, not come easy and will not be for everyone as investors will ask for higher collateral and eye only those developers who have a good track record, a strong pipeline of projects and delivery capability.
Rising Straits Capital, an asset management firm founded by Subhash Bedi, plans to invest around $100 million across residential and office projects in the next year or so.
“As a capital provider, Rising Straits will do equity deals and bulk buying in the residential space. In the current scenario, equity is the preferred mode of investing. While we will not offer greenfield financing solutions or finance land-stage deals, we will invest in under-construction residential and office projects," Bedi said.
Structured debt deals have reduced significantly this year compared to last year, with PE managers and non-banking financial companies (NBFCs) flagging over-leveraged balance sheets of developers.
Investors put in around $1,096 million in equity and $501 million in debt financing in real estate projects, totalling $1,597 million in the January-June period, according to data by News Corp. VCCEdge. Compared to this, $305 million in equity and $1,417 million in debt financing, amounting to $1,722 million, was invested in projects in the corresponding period in 2016, indicating a sharp drop in debt transactions this year.
While equity investments have always taken place in India’s real estate sector, they have mainly been for buyouts of commercial office assets. Residental projects, which constitute more than 70% of the sector, have mostly attracted debt financing in recent years.
Piramal Enterprises Ltd and Ivanhoé Cambridge, a real estate subsidiary of Caisse de dépôt et placement du Québec (CDPQ), Canada’s second largest pension fund, formed an equity platform (where they may invest up to $340 million) earlier this year.
“We have already started analysing opportunities and, needless to say, the qualification criteria for the provision of equity capital would include tier 1 developers with an established track record of delivery, skin in the game and a proven capability of execution within their respective markets," said Khushru Jijina, managing director, Piramal Finance Ltd, a subsidiary of Piramal Enterprises.
“The need for equity capital (and for a longer tenure) has been further enhanced with RERA given that developers’ requirement of capital in a regulated world has increased and the new law places restrictions on the developers’ ability to withdraw capital from the project until completion," Jijina added.
With land prices rationalizing to a certain extent, there are also opportunities in the market today for fund managers to invest at the land acquisition stage with a capable development partner and earn superior risk-adjusted returns over the development life cycle of a project.
First Eagle Capital Advisors Pvt. Ltd is raising its first fund—a Rs500 crore Alpha Advantage Real Estate Fund—that will deploy equity in residential projects.
“Equity is the need of the hour. With project sales slowing down, high-yield debt makes it difficult for developers to service interest payments. There are enough good quality developers who need pure equity. In a post-RERA regime, developers will need equity in the initial stages in a project," said Darshan Khatau, head of fund-raising and investor relations at First Eagle Capital Advisors.
Amit Bhagat, chief executive and managing director, ASK Property Investment Advisors, said that large investors are still looking at mainly income-yielding assets. “We need equity in residential projects now because high-cost debt refinancing, in a situation where project cash flows are not adequate, will become a challenge," he said.
ASK is currently raising a Rs1,000 crore special situations fund (with a Rs1,000 crore greenshoe option) that will provide flexible capital to developers.