Private equity investors open doors to cash-strapped realtors

Private equity investors open doors to cash-strapped realtors

Mumbai: Private equity (PE) investors are opening doors for cash-strapped realtors even as banks have tightened funding channels in the aftermath of multi-crore bribes-for-loans scam.

Asit and Sameer Koticha-promoted ASK Group is launching a 1,000 crore real estate-focused PE fund to invest in high-end residential projects across major Indian cities.

The fund, which will have high networth individuals (HNIs) and institutional investors pooling in money, is being launched at a time when developers are facing a cash shortage after banks have stopped funding.

The Central Bureau of Investigation has arrested eight officials from banks and financial institutions for either taking bribes or leaking vital information from their organizations.

Realtors are increasingly seeking funding from alternative channels such as PE firms and non-banking financial companies (NBFCs) to tide over the cash shortage. A few of them are currently in talks with PE investors to raise funds.

For real estate companies, bank debt is the cheapest mode of raising cash, followed by PE firms, NBFCs and other alternative sources.

Typically, PE investors make a return of 25-30% from such investments over a period of three-four years while banks lend at 12-15% to such companies.

Analysts said banks’ reluctance to fund real estate projects has made realty investments more attractive for PE investors, but raising money from these investors may be a challenge in the current scenario.

“There is a need to bring supply into the market, but at the same time it is not easy to raise money as even HNIs are averse to taking risk by investing in property. It all depends on how the fund is structured," Pranay Vakeel, chairman of consultancy firm Knight Frank India Pvt. Ltd, said.

In the first 11 months of calendar year 2010 alone, PE firms invested $1.24 billion (Rs 5,605 crore today) in real estate firms, up from $749 million that they had done in 2009, according to data from Venture Intelligence, a firm that tracks venture capital and PE deals.

The ASK Real Estate Special Opportunities Fund will raise 500 crore, with the option of retaining an equal amount from ultra HNIs, private clients, banks and insurance companies. It aims at an average return of 25% a year and will have a tenure of six years, with a three-year lock-in period for investors.

ASK Property Investment Advisors Pvt. Ltd, a wholly owned subsidiary of ASK Holdings Pvt. Ltd, will launch the fund and make investments in early-stage projects through special purpose vehicles and holding companies, by taking equity in these projects.

The average investment in projects will be in the range of 75 lakh-1 crore, Sunil Rohokale, executive director of ASK Investment Holdings, said. Individual investors can make a minimum investment of 1 crore in the fund while the minimum for banks and financial institutions is 5 crore, Rohokale, said. The fund plans to invest in 10-12 projects.

“We thought the time is ripe for coming with the real estate fund as the sector is currently facing fund scarcity from other channels, particularly from banks on account of the prevailing market scenario and systemic liquidity shortage. We expect the first close of the fund by end-January," Rohokale, who used head ICICI Home Finance Co. Ltd, said. Typically, such funds have multiple closures.

This is the second real estate fund from ASK Group. In April 2009, it had launched a 326 crore realty fund, which has so far invested 70% of its corpus across five residential projects.

“Companies which have funding capability will definitely get very favourable terms from the developers. If these projects see the light of the day, these funds would stand to make money from the investment," Punit Aggarwal, managing director and chief executive officer of Orbit Corp. Ltd, a real estate developer, said.

“When banks do not finance such projects, it’s a second line of defence," Anand Gupta, treasurer of Builders’ Association of India, an association of 5,000 real estate firms, said.

“I think the market is going to be receptive. In the current environment, it makes sense for anyone to invest in real estate sector. We are looking at opportunities (to invest in the sector)," Ashish Joshi, managing partner (real estate) at Milestone Capital Advisors Ltd, whose firm has around $750 million worth of assets under management, with 90% of that money in real estate.