PEs open up new avenues

Funds are looking at residential projects due to their self-liquidating nature and commercial leased assets that provide attractive rental yields along with capital appreciation.

The real estate sector witnessed most of the transformation in the last nine years after the Government allowed foreign players to invest in 2005.

Soon after that private equity (PE) investors such as Temasek, Xander, Clearwater Capital and Blackstone lead the funding activities to bring in more professionalism and growth in the sector to such an extent that many large players got listed on the Indian bourses and also managed listing in the overseas market.

Investment structure

Earlier, the sector was largely dominated by traditional lenders and was seen as a family business and post 2008, which is after the global meltdown, the investment structure has again shifted to NBFC and private lending along with PE funds.

However, several market players and industry experts feel that the investment scenario at present is on the wane and that most PE funds are desperately looking for exits amidst a prevailing global economic uncertainty and a sluggish growth rate.

Structurally, PE funds have a lifecycle of 5-7 years and some have already completed that cycle considering the fact that most of the investments happened during 2005-07.

According to a 2012 report by property consultant Jones Lang LaSalle (JLL), the first round of fund raising post 2005 took place on the basis of the macro economic growth story of India. Many of the blue-chip global real estate investors have shut offices now and many smaller home-grown investors have become key investors in this market.

It further said that the ability to recover capital and returns will differentiate the fund managers in the next round of fund raising and also bring the spotlight on ‘investment grade’ developers.

A recent report by real estate consultancy Cushman & Wakefield said that there has been a sudden interest among PE players despite the fact that India is reeling from a slowdown and inflation pressure.

Sliding investments

In the first half of 2013, the PE flow had dropped by 46 per cent. Despite that the PE firms have around $2 billion (Rs 11,854 crore) corpus for the sector.

The PE investments in real estate were recorded at $276 million (around Rs 1,638 crore) in first half of 2013 compared with $514 million (around Rs 3,050 crore) in the same period last year, stated Cushman and Wakefield. Sanjay Dutt, Executive Managing Director South Asia, Cushman & Wakefield, said in the report that the rising interest was surprising. However, they (PE) are exploring the market for right projects, he added.

Randhir S. Kochhar, Partner, Ernst and Young, said PE players are looking at projects instead of entities. Within the sector, funds are looking at residential projects due to their self-liquidating nature and commercial leased assets that provide attractive rental yields along with capital appreciation.

In 2013, the highest value of private equity investment was in Pune $131.6 million (Rs 780 crore) followed by Mumbai at $67.5 million (Rs 400 crore).

Source: Business Line

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