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Business News/ Companies / News/  IDFC’s PE arm sells SEZ, IT park for Rs1,100 crore
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IDFC’s PE arm sells SEZ, IT park for Rs1,100 crore

IDFC frees up capital for launch of banking operations with sale of Pune, Noida properties to Blackstone Group

Shares of IDFC lost 0.88% to close at `140.60 on Monday, while the benchmark stock index Sensex lost 0.11% to close at 26,597.11 points.Premium
Shares of IDFC lost 0.88% to close at `140.60 on Monday, while the benchmark stock index Sensex lost 0.11% to close at 26,597.11 points.

Mumbai/Bangalore: IDFC Alternatives Ltd, the private equity (PE) arm of IDFC Ltd, has sold two of its real estate investments to private equity firm Blackstone Group LP, the seller said on Monday.

The assets—a special economic zone (SEZ) in Pune and an information technology (IT) park in Noida—were sold for a combined enterprise value of 1,100 crore, providing a 22% internal rate of return to IDFC Alternatives, a top official at the firm said.

IDFC Alternatives had invested 415 crore in Galaxy Mercantiles Ltd, an IT park in Noida during 2011. A couple of years later, it bought the entire Phase 1 of Neopro Technologies Pvt. Ltd, also known as Blueridge SEZ, located in Pune’s Hinjewadi area, for 460 crore. Both the investments had been made from its parent IDFC’s balance sheet.

The firm’s decision to exit its real estate investments comes at a time when IDFC, having received an in-principle approval from the Reserve Bank of India (RBI) to launch its banking operations, is looking to free up capital from its balance sheet.

Commenting on the development, M.K. Sinha, managing partner at IDFC Alternatives, said: “We had to sell our real estate investments prematurely as we could not keep a large portion of the proprietary equity of IDFC locked as the firm is just a few months away from launching its banking operations."

IDFC, which received in-principle approval from RBI in April and plans to launch its banking operations in October 2015, will require a large amount of capital to meet the regulatory requirements and for expansion.

Sinha added that IDFC Alternatives will tweak its real estate strategy to focus on affordable housing instead of commercial property.

“Interest rates will soon begin to soften. Rentals are moving up. Also, availability of quality commercial real estate is very low as most of the projects have been lapped up already," said Sinha.

IDFC Alternatives had made two investments in real estate to demonstrate the firm’s investment expertise in the sector. The firm had been looking to raise a fund focused on commercial real estate. The plan has now been put on the back burner.

“By the time we would have finished raising the fund, interest rates would have come off significantly and rentals would have moved up. We do not want to enter at the wrong side of the cycle," said Sinha.

Therefore, the firm will now be launching a fund focused on affordable housing, tweaking its earlier plans. The funds will be raised mostly from foreign investors and the fund size is expected to be about $500 million.

Blackstone declined to comment.

The information technology (IT) sector drives nearly 70-80% of the office space demand and absorption in the country. After a prolonged slowdown, which saw commercial office space demand at its lowest, things are looking up.

“We will be looking to invest in projects priced between 40 lakh and 70 lakh. There is plenty of scope in this (affordable housing) space on account of rapid urbanization taking place," said Nimesh Grover, partner, real estate, IDFC Alternatives. The fund is expected to be launched in the next quarter. The investment will be made through structured transactions.

Grover added that with the guidelines coming out for real estate investment trusts (Reits), commercial property developers are no longer parting with projects. The Reit guidelines released last week will allow cash-strapped real estate developers to mobilize money from high networth individuals (HNIs) and institutional investors. The minimum investment in Reit should be 2 lakh.

With Reits finally becoming a reality, property analysts believe that large funds such as Blackstone will show a keen interest in office assets. Reits typically invest in completed, yield-generating realty assets and distribute a major part of the earnings among investors. The income of these investment trusts mostly comes from the rents received from these properties. According to regulations recently announced by the Securities and Exchange Board of India, at least 80% of the properties in the special purpose vehicle should be complete and rent-generating.

Ravi Ahuja, executive director at property advisory Cushman and Wakefield India, said that following months of an inventory overhang and consistent and steady price decline in the office space segment, funds and HNIs can find good investment opportunities in IT corridors as valuations are low.

“With Reits being allowed now, funds would have accelerated the pace of acquiring assets with a possibility of an exit within a period of three-five years," said Ahuja.

The year 2014 has been an intense year of deal-making for Blackstone. In April, it invested 550 crore to acquire a 60% stake in Vrindavan Tech Village—a special economic zone in Bangalore to be developed by Embassy Property Developments Pvt. Ltd that invested 450 crore.

In another large transaction, Blackstone, along with Pune-based Panchshil Realty, acquired Express Towers—a well-known commercial property in Mumbai’s oldest business district, Nariman Point. It also invested in Ozone Group’s residential project in Chennai, where it bought inventory worth 175 crore.

For IDFC, it has raised a 750 crore debt fund focused on residential real estate in March this year from domestic investors. IDFC Alternatives has a total of $3.4 billion of assets under management across PE, infrastructure and real estate.

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Published: 29 Sep 2014, 06:42 PM IST
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