Realty funds find sweet spot as financing becomes hard to get

Realty funds find sweet spot as financing becomes hard to get

Mumbai: As funds from banks and capital markets become more difficult to access, property developers are increasingly looking towards real estate funds to carry their projects forward.

“Earlier, there was money chasing assets. Now, there are assets chasing money," said Ved Prakash Arya, managing partner of Mumbai-based Milestone Capital Advisors Ltd, that manages $ 600 million across three domestic and one offshore fund.

Mint had reported on 6 October that Indian real estate companies are struggling for financing as the banking regulator has directed banks to tighten lending to the sector.

The sorry state of the capital markets has added to their woes.

This year, only 42 companies have raised Rs19,396 crore through initial and follow-on public offerings — and more than half the amount was garnered by Reliance Power Ltd alone. This compares with 109 companies raising Rs48,834 crore in 2007.

This has resulted in realty funds virtually being the only source of raising large amounts of money for real estate companies. Consequently, these funds are calling the shots and getting a better deal for themselves.

“While we asked for a 20% return last year, now we demand 28-30%," said Arya.

“While the risk is entirely borne by the developer, the first returns come to the fund," said Ramesh T. Jogani, managing director and chief executive officer of Indiareit Fund Advisors Pvt. Ltd, the real estate funds division of the Piramal group that has $450 million (Rs2,191.5 crore) under management across three funds.

He was talking about the so-called preferred-returns clause built into agreements with developers.

Jogani said the new deals also ensure the developer does not use the capital to “cash out," or pay up for the land that he has previously bought. Rather, it’s used to fund the development of the project.

The local funds may be better placed to capitalize on this changed attitude from developers, as the global capital crunch has made India a less-favoured destination for overseas funds.

“There was $14 billion expected to come by way of private equity into real estate in the next 12-18 months," said Pranay Vakil, chairman of real estate consultancy Knight Frank India Pvt. Ltd, citing a compilation of published material as his source for that number. “But now, not even a tenth of that will come in."

Besides Milestone and Indiareit, other large domestic entities include HDFC Property Fund, ICICI Venture Funds Management Co. Ltd’s realty fund and Kotak Realty Fund. Most of these have separate local and offshore funds, and Jogani of Indiareit estimated that they, together, have deployable assets worth $1.5-2 billion.

Funds raised offshore for real estate projects have to follow stringent foreign direct investment rules that stipulate that the money can only be invested in projects with a minimum area of 50,000 sq. m.

There is also a three-year lock-in period for these investments, and the minimum amount has to be $5 million if the funding is in partnership with a locally raised fund, or $10 million if the fund raised overseas is the sole investor.

All foreign funds that operate in India follow these norms because their money is raised offshore.

Among the more active foreign real estate funds in the country are CapitaLand Ltd and Keppel Land Ltd from Singapore, Dubai’s Emaar Properties PJSC, US-based Walton Street Capital Llc., and the real estate fund arms of Morgan Stanley and Blackstone Group Lp.

Even if there are better deals for the taking for real estate firms, niggling concerns remain about falling property prices.

“Nobody knows what the value of land is. Pricing is adjusting on a day-to-day basis, and any number of international investors are chopping risk from their portfolios," said Sourav Goswami, managing director of Walton Street Capital India Pvt. Ltd, which has so far made $200 million worth of investments into Indian realty.

“Even if there are pledges on returns, there are no securities backing that pledge," he pointed out.