Private Equity stimulates Real Estate Segment

What is Private equity (PE) :

Simply put, a private equity fund is similar to a huge mutual fund, where each investor invests in multiples of at least 10-50 crores instead of contributing a few thousand to a few lakhs. They have a fund manager known as the General Partner, who in turn, identifies and selects the real estate project within which to invest this money in. The fund supplies the financial support for the project while the developer is responsible for its day-to-day execution.

PE’s introduction to the Indian Realty Sector :

At the start of a new project, regulatory permissions and funds for the project are the two biggest concerns for a developer. Wontedly, developers either relied on their own finances or had to borrow it from their personal/business network, or borrow a loan from the bank. With the success of the IT/ITES sector during the early to mid-2000, a boom in the Indian economy was witnessed which in turn changed the conceptual system for funding in the real estate sector. India needed a multitude of new office space; the aspiring middle class desired modern houses while the retail sector witnessed a boom as the purchasing power of the general public substantially increased. This caused a conspicuous increment in the property prices and allured a multitude of players wanting to invest within the Indian real estate. One such prominent category was of the private equity investors,both domestic and foreign.

Private Equity in Tier I Cities:

Private equity (PE) investments within real estate sector during the quarter from April to June increased both in value and volume to $318 million over $172 million, an increase of 85%, raised by real estate companies from PE investors in the corresponding quarter last year. On a chronological basis, there was a drop from $569 million which the companies had raised during the quarter from Jan to March. During the recently concluded quarter, 13 companies received investments from PE investors as compared to the six within the corresponding quarter of last fiscal.

PE firms such as Blackstone – which recently concluded the most commodious real estate deal this fiscal (during the quarter from January to March) up until now by investing $367 million in the Bangalore project of Embassy Group – have completely refocused on the real estate sector. As per experts belonging to a firm which tracks PE investments, PE firms are turning increasingly more aggressive towards real estate investments than the traditional sectors and are keen on investing even further.

During the June quarter, Ascendas Trust’s acquisition of 2 million square feet of Hyderabad’s office space from Phoenix Group at a cost of $110 million was recorded as the biggest investment. This was then supervened by an investment of $52 million by Xander’s in the 125 acre township project in Gurgaon developed by Supertech; and the consortium of Clearwater Capital, Ajay Piramal Group along with the non-banking financial company PHL Finance $50.2 million investment to finance land parcel acquisitions by VGN Developers to develop a gated community project within the city of Chennai.

Private Equity – Exits in real estate segment

Going forward transactions might gain traction as developers are still waiting for manna from banks. With funding from banks dwindling and degenerating, builders and developers alike are left with few options other than seeking PE investments. However, realty experts expect the next six months to be comparably better. The real estate market witnessed more exits by private equity firms within the quarter ended June of 2013 than in the corresponding quarter of the last fiscal.

During Q2, secondary sale transactions witnessed global funds, new and old alike, making significant-size investments to buy out their peers. The realty sector witnessed five buybacks of investor stakes by developers or their promoters. IL&FS Investment Managers (IIML) sold its stake of Rs.325 crores, in Bhartiya City, which is a 125 acre integrated township project within Bangalore. Godrej Properties bought back the stake in two of its projects which was held by HDFC PMS, in Chandigarh and Chennai. Parsvnath Developers had repatriated Rs.34.56 crore from the Exotica Gurgaon residential project, to PE investor Sun Apollo.

PE firms have learnt well from the first wave of investments made during the initial period starting from the fiscal of 2006 till the ending of the 2009 fiscal, during which numerous PE investors and firms alike burnt their hands. Presently, majority of the transactions are debt transactions which do not involve any equity, as not a single project in which firms took equity during the first wave were completed on schedule.

The bulk of deals have occurred within the residential space of Tier 1 cities, as funds driven by better returns are focusing primarily on residential properties within large cities. Even though the opportunities provided by lower tier cities is considered as untapped, nobody is instantly investing in them as the fascination for Tier 2 and 3 cities has utterly died down, and it would take time before firms start generating interest in them again.

The current trend followed by PE firms suggests that fewer developers are chosen this time as compared to earlier when firms would engage with multiple partners. For example the Blackstone group for its investments, has been engaging primarily with the Embassy group.

Never the less, real estate investments by PE firms within the first six months of 2013 with 21 transactions ($887 million across 20 deals with disclosed values) is albeit 16 per cent down compared to the 25 investments in the corresponding period during the fiscal of 2012 ($659 million across 22 investments).

Private Equity – Exits in other segment

Apart from those within the realty space, PE firms gradually departed from 29 Indian corporations throughout the quarter. During the June quarter of 2012, the number of exits was at 21, as per the data compiled by a research service focused on private company financials, transactions and valuations in India. Complete exits were made by 21 companies from the list of 29; the remaining eight exits were of partial nature. PE investors dextrously timed the run-up within the markets from the period beginning from mid-April till the end of May to exit few of their investments in listed corporations.

A significant complete exit via the public markets during the quarter was the one by Warburg Pincus from Havells India with a nearly 2.5 times return on the investment of Rs.484 crore. Among notable partial exits through this route, Apax Partners sold Rs.128 crore worth of shares in Apollo Hospitals. In the sole PE-backed IPO, of Internet and mobile-based local search firm JustDial, investors SAIF, Tiger Global, Sequoia Capital India and SAP Ventures made a healthy exit.

The sale of their shares accounted for over 80 per cent of the Rs 927.37 crore issue. At the IPO price of Rs 530 per share, SAIF was sitting on an over-10 times return on its investment and Tiger Global 7.3 times. The largest public market sale fetching a complete exit was the sale, by TPG, of Rs 1,652 crore worth of shares in truck finance firm Shriram Transport Finance (STF). Analysing the total number of PE exits, the real estate segment has witnessed significantly lower rates of exit.

Advantages of Private Equity

The major worries of a residential property buyer include, the completion of the project within which they have booked their home on schedule, within the budget and with the highest level of quality standards. One of the mechanisms which could provide great relief to such a buyer is the presence of a private equity fund behind the respective project. Typically, the fund would invest in a project for a period of about three to five years, requiring the project to be completed and sold during that time. Hence, a PE investment in a project gives it a stamp of approval – the buyer can take comfort in the fact that the fund would have carried out due professional diligence before investing in the project, therefore be more assured about its timely and cost effective execution. As per realty experts, the experienced funds also bring their international experience and oversee the development of the project as per international standards.

How to identify a PE funded project

Since, a project backed by PE funds generate more goodwill and trust, the bulk of developers (almost 80 per cent and above) usually include the name of the PE firm on the project brochures. Furthermore, a prospective buyer could seek out news pertaining to the project, and the name of the PE investor or firm is bound to come up. Contacting the developer directly might also answer the same. Another important factor to consider while trying to determine the projects funding is that projects with massive development costs running into multiples of crores would attract PE funding; as investors in PE funds contribute in multiples of crores.