Mumbai: Essel Finance Advisors and Managers Llp, the private equity (PE) arm of Subhash Chandra’s Essel Group, plans to invest in affordable and mid-income housing projects at a time premium residential projects are struggling to sell, a top executive said.

Essel Finance has invested 40 crore through non-convertible bonds in two affordable housing projects of Rashmi Housing Pvt. Ltd at Mira Road and Naigaon in north Mumbai. Both projects are now almost complete.

Essel Finance is in the process of investing another 35 crore in a third project of the developer. The investment has been done from ASSET-1, Essel’s maiden real estate fund.

“Keeping the current market scenario in mind, focusing on affordable housing segment makes a lot of sense, as there is still high demand in this segment and the government is also focusing on this segment," said Abhinav Bhushan, chief executive, private equity, at Essel Finance.

Earlier this year, Essel had invested 40 crore in another affordable housing project of Maple Group in Pune’s Chakan area, which sells homes under Aapla Ghar brand.

“Selection of the right partner is very critical for investment in this segment as margins are thin. Our current partners have extensive experience in the affordable segment. Rashmi Housing, for example, is focused in north Mumbai, from Mira Road to Virar, and has a track record of delivering homes to 14,000 customers," Bhushan said.

In south and central Mumbai where property prices are really high, sales have fallen in the last couple of years. Rashmi Housing, which builds in the far suburbs of the city, sells one bedroom-hall-kitchen homes for 25 lakh.

“We will use the money for construction of the two projects," said Yogesh Bosmiya, director, Rashmi Housing.

In the next two quarters, Essel Finance plans to invest another 400 crore in affordable and mid-segment projects. It is in an advanced stage of closing a transaction in a mid-segment project in Bengaluru. Once these investments are done, Essel plans to raise a new domestic fund to invest in affordable housing projects. Bhushan didn’t give details of the proposed fund’s size.

Private equity funds, particularly the local ones, find comfort in funding mid-segment and low-cost homes because there are takers for these products even when the sector is going through a slowdown.

In April, Puravankara Projects Ltd and ASK Property Investment Advisors Pvt. Ltd bought land in Chennai’s Poonamallee area for 110 crore, where the Bengaluru-based developer plans to build affordable homes through its subsidiary Provident Housing Ltd. International Finance Corp. (IFC) has said it will invest $25 million in Tata Value Homes, the affordable housing subsidiary of Tata Housing Development Co. Ltd, in May.

“In affordable housing projects, profit margins are much thinner and one has to assume that the project gets the costing right and the requisite sales volume," said Shouvik Purkayastha, managing director at property advisory Cushman and Wakefield India.

From a fund’s perspective, the costing of the project is critical to make adequate profits, and for that, it is key to get land at the right price and the right location.

“Equity transactions work well for affordable housing projects because it is long-term money, instead of high cost debt that needs to be serviced in a short span of time," Purkayastha said.

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