Real estate joint investments favor developers, financial firms
Joint ventures in development of real estate projects have been acting as a platform for financial services firms in the recent times. Many such firms have been attracting good deals of investing in project development along with developers.
Financial services companies are getting larger deals with realty developers than in recent years by getting group firms to invest in or lend to them jointly. This new trend is beneficial to both the entities as the financial services firms can get more debt financing deals with fixed returns, while for cash-crunched developers, it is an easy way to maintain liquidity.
Besides this, in the present scenario of sluggish economy, developers have been facing tough challenges in raising funds for buying land, spending over construction of projects or to repay debts. Many such developers had to be content with small-sized investments and loans owing to liquidity crunch. Joint investments provide much relief to real estate companies struggling for capital.
Apart from providing financial aid, joint investments are also beneficial in many ways. The key benefit is that the two or more entities entering into a joint venture can share the risks associated with the investment. Joint ventures also allow a firm to penetrate new markets/industries and to expand into new geographical areas. Even a small company in a highly concentrated industry can get into joint ventures with leading firms which can constitute a much safer network.
A few days ago, India Infoline Ltd (IIFL), a leading player in the Indian financial services space, signed a deal with Wadhwa Group, in which it will invest Rs 350 crore for a slum redevelopment project in Chembur, Mumbai. The finance firm collaborated its non-banking financial company (NBFC) and two of its funds raised to invest in this project. It even had to seek funds from its wealthy individual clients for the remaining investment.
In the last month too, two IIFL group firms had invested Rs 110 crore in a housing project in Ghaziabad that is being developed by Shipra Group.
Two Kotak Group companies have made an investment of Rs 170 crore in Runwal Group. With the help of this fund, the developer had acquired 150 acres of land in Mumbai suburbs. Kotak Mahindra Bank Ltdâs NBFC gave Rs 100 crore while Kotak Realty Fund provided Rs 70 crore and these were considered as individual deals. However, the two firms had ventured together for the deal. This was the first such deal by Kotak Group although it is expected that it would go ahead with more such deals in the coming days.
A finance expert said that joint deals involving group firms attract large and attractive deals. Such ventures also provide an opportunity to their clients to participate, he added.
With individual financial firms show reluctancy towards taking on additional exposure to India’s volatile realty sector, joint deals like these will be the trend. As per senior officials of capital investment firms, clients (of these financial firms) would receive some sort of comfort bearing the knowledge that the firms themselves have invested their own money in the venture. The combined fee income of such transactions would also be far higher.
In many cases, it is possible that joint deals serve to limit the lending exposure of their group companies. Analysts say that the deals will ensure good returns only when good synergy exists between the entities. As per experts, investors do not have to bother whether the money for the project has flowed in from a single or two sources as long as there is synergy among the entities.
At the current market scenario, private equity (PE) firms have become very conservative and cautious to invest in real estate companies. Hence, they have restricted the deal sizes and are hesitating to invest in more transactions. But NBFCs, have become popular nowadays in lending to real estate firms and thus have become a preferred channel of borrowing capital.
