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Realty funds looking at low-cost projects

Realty funds looking at low-cost projects

Bangalore: The recent launch of Rs5-15 lakh homes by realtors across the nation has attracted not only homebuyers. Property funds that have stayed away from the realty sector since the global economic downturn deepened in September are looking at a comeback, primarily to back low-cost housing projects.

“A year back, property funds were eyeing projects like iconic towers and exclusive homes riding on the boom. Those days are over," said Naresh Nadkarni, chief investment officer, HDFC Realty Fund. “Funds are now only focusing on low- and middle-income housing because that’s where the movement is."

The HDFC fund is at an advanced stage of sealing a Rs200 crore investment in a middle-income project by Provident Housing and Infrastructure Ltd, a subsidiary of Puravankara Projects Ltd, two analysts familiar with the project said. They didn’t want to be identified.

Nadkarni declined to give details, citing company policy.

The project in Bangalore will have at least 4,000 homes with a price tag of Rs10-20 lakh each. Puravankara recently launched a similar project in Chennai.

Developers such as Puravankara and Tata Housing Development Co. Ltd have ventured into low-cost housing in the past two months, after a spate of affordable projects in the Rs30-60 lakh range launched by several developers failed to pick up.

In 2008, real estate funds made 77 investments worth a combined $8.4 billion (Rs39,984 crore today) in property companies and special purpose vehicles, according to Venture Intelligence, which tracks venture capital and private equity (PE) deals in India. About 80% of these investments were for special economic zones, or mall or township projects.

Of the total investments in 2008, nearly 70%, or $5.8 billion, was made in the first half of the year. Investment projections for 2009 are not available yet. This year, the focus for realty funds has moved from providing aid to developers in distress to helping construct large, cheaper projects that will sell quickly.

The Ajay Piramal-promoted Indiareit Fund Advisors Pvt. Ltd has invested Rs250 crore in four such projects—three in Mumbai and one in Hyderabad. Of these, one is in the Rs5 lakh per house category and the rest in the mid-segment range. Ramesh Jogani, managing director and chief executive officer of Indiareit, said: “This year, we will look at a mix of projects including both these segments. We want to finance projects that are just beginning construction."

The fund, which is planning a round of domestic fund-raising of Rs500 crore in 2009, last year exited a luxury project in Alibaug, a seaside destination near Mumbai. It had earlier committed Rs250 crore to the project, which was to be developed jointly with Samira Habitats.

Realty funds are also trying to gauge the risk factors attached to such low-cost projects. Indiareit and Red Fort Capital Fund Advisors Pvt. Ltd say that though investing in the low- and mid-cost segments is a safe bet, they are studying the project models to ensure they have the right sourcing of material, location and price. With thin profit margins and tight costs, it is imperative the projects are completed on schedule.

“Like ours, many funds are working out the actual details of a project with developers, and even restructuring aspects to make a more viable business model," said Nadkarni. Possibilities of delays in getting approvals, construction costs rising, and a strict price point make such projects riskier than regular ventures, he said.

Nayan Bheda, managing director of Neptune Developers Pvt. Ltd, which has launched a 125 acre low-cost project near Mumbai, funded by Indiareit, and has three more planned in Chennai, Nagpur and Pune, says only such projects can assure sales. For instance, Nepture has sold 2,000 of the 2,100 units in the first phase of its Mumbai project in just 2 months.

“PE funds demand higher IRR (internal rate of return) of over 24% in such projects as the appreciation of profit is not high. But we have been lucky with Indiareit as an investor," Bheda said.

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