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As the Indian real estate sector faces several financial constraints, private equity investors are cashing in on the opportunity, providing funds at substantially higher rates

At a time when funding sources for real estate companies dry up, private equity (PE) investors have continued to raise money in the domestic and overseas markets, to invest in India’s real estate. PE investors have cashed in on the opportunity, providing funds at substantially higher rates, as the real estate sector faces severe financial constraints.

At least half-a-dozen financial institutions have raised funds recently for investment in real estate projects. The list include ASK Investment Holdings (Rs 1,000 crore), Kotak Realty (Rs 523 crore), India Infoline Venture Capital (Rs 500 crore and Rs 200 crore) and Motilal Oswal’s India Realty Excellence Fund (Rs 200 crore).

“PE investors in real estate have, over the past two years, changed their investment strategy with a more risk-averse approach,” says Avinash Gupta, head – financial advisory, Deloitte India. According to him, they are now taking exposure to projects with higher cash flow visibility in the short to mid term (three to five years), which translates to investments in mid-size (non-township) residential developments and projects with key approvals already in place.

PE investors are targeting tier-I cities only and tier-II cities are no longer on their radar.

“Over the past two years, a lot of non banking finance companies (NBFCs) have also come up focusing on high-yield real estate lending as a proxy to real estate equity investing. There are more than 10 NBFCs in this space that have lent money to developers and are quite active in the market. These NBFCs have gone for a more protected structure with hard security and escrowed cash flows,” adds Gupta.

Tapping overseas investors is also catching up among real estate financiers. ASK group, for instance, is in advanced stages of raising funds abroad through its Singapore-based subsidiary, ASK Capital Management, which has already received approval from Monetary Authority of Singapore for its ASK India Real Estate Special Opportunities Fund. The ASK overseas fund worth $200 million is domiciled in Singapore. According a senior company official, the fund-raising starts by October, with first closing targeted by March 2013, while the target for final close is by 2013-end. The investment strategy is clearly spelt out: project-level, mid-segment residential developments in top five cities of India.

Key investors that ASK is targeting for investments in the overseas fund include family offices, ultra HNIs, institutions, sovereign funds and endowments.

Kotak Realty is another PE raising funds abroad. “We have recently launched an offshore fund. Our fund-raising plan is flexible, as per demand,” said V Hari Krishna, director, Kotak Realty Fund, without disclosing further details about their offshore fund.

In January, Red Fort Capital, an international PE player raised $500 million from international investors for residential and commercial real estate in India.

ASK Investment Strategy, as described by its top management recently, includes investments in top seven cities — Mumbai, Delhi–NCR, Bangalore, Chennai, Pune, Hyderabad and Kolkata, and focuses on projects within city and suburban limits and partnering with prudently managed developers. In Mumbai, ASK has invested in two redevelopment projects in Mulund West (6.9 acres) and Chembur (3.8 acres) by two developers, Rajesh Builders (Rs 92 crore) and Godrej Properties subsidiary Godrej Landmark Redevelopers (3.8 acres/Rs 22 crore). It is investing in a few more projects. Last week, it announced an investment of Rs 77 crore in a residential project in Bangalore being executed by Mantri Devel­opers over 2.72 acres in the heart of the city called Lalbagh Road.

The focus, says Sunil Roh­okale, managing director and CEO, ASK Investment Holdings, is to make investments in securities of asset level special purpose vehicle, self liquidating residential developments, redevelopment of residential projects, and distressed valuations for recapitalisation of projects.

On the strategy they adopt while investing in real estate projects, Krishna of Kotak Realty Fund, said, “It depends on return investors are looking at. For debt kind of return, we invest in projects much closer to approval. For equity kind of return, we take more risk and invest in projects before approval and locations which are still not fully developed.”

Kotak Realty has already committed Rs 523 crore raised in December 2011. “We have invested in two projects and committed money for three more projects,” Krishna said.

Kotak is more selective when it comes to selecting cities for investment, “We invest only in the top four cities – Mumbai, Delhi NCR, Bangalore and Pune,” Krishna said.

India Realty Excellence Fund by Motilal Oswal focuses on investing in affordable and mid-income residential and redevelopment projects backed by well-established mid-sized developers across Indian metros. The average ticket size per project is typically in the range of Rs 20-30 crore. The fund aims to achieve superior returns by investing capital through equity and/or equity-related instruments and other securities in core projects in the nature of ready/ under construction/ ready for construction projects with a completion horizon of not more than four years.

Most of these investors look at smooth exits and try to avoid projects where exits may take longer due to approvals and size of the projects. “We look for an exit in three to five years,” Krishna added. ASK Property Investment Advisors has already returned 40 per cent of first fund of Rs 300 crore raised more than three years ago to the investors.

In aggregate, Kotak Realty Fund has generated exits worth Rs 1,200 crore ($233 million) till date. Kotak Realty Fund now manages a combined asset under management of Rs 3,500 crore ($700 million) across five funds.

For PE investors, small is beautiful, when it comes to investing in real estate projects. There is a clear shift in their investment strategy in India. Large real estate projects comprising 50-100 acres in suburbs, and projects having large luxurious apartments are no longer their favourite investment destinations. PE investors are increasingly opting for projects within city limits that are spread over smaller areas and having compact two to three bedroom-hall-kitchen (BHK) apartments.

Sunil Rohokale, managing director and CEO, ASK Investment Holdings, says, “A few years ago, thematic townships of 100 acres were popular among investors. Now the focus is on compact size townships.”

PE investors are realising the challenges thrown to the real estate players by the economic slowdown that nearly killed the demand and threw up financing hurdles for ongoing projects. Also, investors are stuck in several projects and are finding the exit tough.

Real estate projects where investments are happening now are much more thoughtfully selected, taking care of the risks. Investors are looking at those developers who have aggregated land.

“PE investors are not so keen on redevelopment projects – primarily because these are a long-drawn process, and involve a political process as well as socio-economic issues to address to,” said a PE player.

By Ravi Ranjan Prasad, Via : mydigitalfc.com