Private Equity Fund

PE funds set to extend investment spree in real estate

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PE funds set to extend investment spree in real estate

GIC, Blackstone Group and Warburg Pincus were the heaviest investors in 2015 in a sector that has stagnated in recent years
If the real estate slowdown persists in 2016, developers will need more capital as operating cash flows will remain weak. Photo: Abhijit Bhatlekar/MintIf the real estate slowdown persists in 2016, developers will need more capital as operating cash flows will remain weak. Photo: Abhijit Bhatlekar/Mint
Private equity (PE) investors are expected to infuse more money into India’s real estate market in a sign of their continuing confidence in the long-term viability of a sector that has struggled for the past two years.
With cash flows from projects remaining weak, developers went on an aggressive fund-raising drive in 2015. According to data from VCCEdge, which tracks investments, PE funds in 2015 invested nearly $2.77 billion in real estate projects and companies across 81 deals, against $2.1 billion in 2014 through 90 deals.

Unlike the slowdown in 2008, this time there seems to be no dearth of capital in the real estate sector, though most of the money capital available from domestic funds is in the form of structured debt as fund managers remain cautious of taking equity risks.

Government of Singapore Investment Corp. Pte Ltd (GIC), a sovereign wealth fund, Blackstone Group Lp and Warburg Pincus Llc were the heaviest investors. Blackstone, India’s largest owner of office assets, purchased an office project in suburban Mumbai for about Rs.1,060 crore, while an affiliate of Warburg Pincus picked up a minority stake in Piramal Realty, the real estate development arm of Piramal Group, for Rs.1,800 crore. The latter was one of the largest single investments in a real estate firm in recent years.

GIC struck one of the largest transactions in 2015, where it invested Rs.1,990 crore in two projects of DLF Home Developers Ltd, a DLF subsidiary, as the two entered into a joint venture.

Among domestic funds, Piramal Fund Management Pvt. Ltd, the investment arm of the Piramal Group, was the biggest investor, offering various forms of capital including construction finance, debt and structured debt products and equity.

Piramal Fund Management sanctioned about Rs.10,500 crore between April and December in 2015 and is looking to sanction Rs.3,000-4,000 crore more before March. The fund opted for select top-tier projects, making fairly large investments.

“We feel that this theme will continue well into 2016 as there is still an opportunity to deploy capital at attractive risk-adjusted returns in selective opportunities. The fact that there is a certain amount of stress prevalent in the system today is also translating into developers being able to get land at cheaper prices, thereby improving the overall economics, marketability and financing of a project,” said Khushru Jijina, managing director, Piramal Fund Management.

Office projects not only fared better than residential projects in recent months but also saw some big-ticket transactions. Among residential projects, top developers with a good track record, delivery background and associated with bankable corporate brands attracted investors.

In 2015, Piramal Realty raised growth capital from top investors such as Warburg Pincus and Goldman Sachs. Goldman picked up a minority stake in the developer, investing Rs.900 crore to help it buy properties in and around Mumbai.

Barring these big-ticket equity transactions aided by the greater participation of offshore investors, debt remained the fund-raising avenue of choice in 2015. Many developers, primarily mid-sized and small, raised debt to fund projects, pay for land and, most importantly, replace existing debt with new loans.

With offshore and domestic funds, non-banking financial companies and private investors competing to invest in real estate, lending rates have also come down.

“FDI (foreign domestic investment ) inflows were large but very concentrated—a small number of investors focused on platforms, or multiple deals with a small number of tier I developers. On the other hand, domestic investors were the only saviours for a large number of mid-tier developers,” said Ritesh Vohra, partner, real estate investments, at IDFC Alternatives Ltd.

“In 2016, on the residential side, I expect structured debt and structured equity becoming more commonplace and taking market share from regular high-yield debt. On the commercial side, there will be greater interest in retail and warehousing assets as the number of investment grade office assets dwindles,” Vohra said.

If the real estate slowdown persists in 2016, developers will need more capital as operating cash flows will remain weak. In such a scenario, investors will adopt a more cautious approach while assessing potential deals and that may also mean subdued financing volumes. Investors will have to weigh the risks versus returns equation and be prepared for longer deal tenors that allow them to sustain through the slowdown, analysts said.

This year is also expected to see higher investments and a return of equity or structured equity capital.

“While structured debt will continue to dominate the real estate investment scenario, some funds will be willing to take a little more risk hoping to make better returns, in the process leading to more equity deals than what we saw in 2015. These will be more selective, individual transactions with top developers,” said Ambar Maheshwari, chief executive officer, private equity funds, Indiabulls Asset Management Co. Ltd.

This year is also expected to see a few more large sovereign wealth funds, pension funds and other global investors partnering developers in India to create investment platforms, which typically start with a pilot investment, after which the investor makes a larger commitment to jointly make more transactions. “Investments in real estate have become broad-spread, with many offshore investors looking to ink transactions with developers directly now through platform deals. We will see more such platform or partnership deals to build greenfield projects this year, not just in residential but also in the commercial office space,” said Rajeev Bairathi, executive director (capital transaction group and north India), at property advisory Knight Frank India.

- by Madhurima Nandy

Source:- LiveMint

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