VCCircle

As the Reserve Bank of India has been tightening the lending screws on the real estate sector, special purpose vehicles have become a preferred route to raise money for real estate companies from private equity players. "Private equity players find it safer to invest in projects rather than a developer. A lot of developers are also finding easy that way. Once a private equity fund enters, the project suddenly becomes viable because it has the money to execute," said Ashish Bahalla, Managing Director of Millennium Spire India Management, a real estate investment firm.
Look at some of the recent SPV deals. Sun Apollo Ventures is believed to have closed a $76 million deal in the SPV of Amrapali Group, which is developing a 200-acre township in Jaipur, and a 15-acre high-end housing project in Noida. Similarly, TAIB Bank is investing $50.44 million for a 26 per cent stake in the SPV of Anant Raj Industries, while Lehman Brothers Real Estate Partners is acquiring a 50 per cent stake in Unitech's Mumbai project. (See a list of major SPV deals).
An increased liquidity pressure coupled with declining internal accruals and reduced funding options, the sector is already reeling under pressure. Add to it, is the post quarterly monetary review of the Reserve Bank of India, where it's decision to raise repo rate and cash reserve ratio is expected to further add to woes of the real estate sector. Already banks have raised their prime lending rates, and the residential demand is likely to get hit, said industry observers. "Even if the developer now takes loan which is difficult to get anyways, where is the assurance that buyer is there," Bhalla.
Real estate players are already grappling with dwindling sales, correction in land prices, tepid demand, and rising input costs, even as they face a liquidity squeeze. The developers are now looking at other sources of funds, and they find no other option than to raise money from PE players for particular projects, because the situation out there is extremely scary.

"Most mid size developers, be it at the regional levels have taken over a lot of load. All these people have got more projects than they can execute. They have more agreements to buy land than they have money for. They have applied for licenses but have no money for licensing fee and construction. All of them have three – four files lying somewhere in want of funds. And in a market where sales are being restricted to genuine investor and to some extent cautious investors, there isn't much liquidity for a free flowing real estate river that it was a few years back. Ever larger guys are trying to shed their load", said Bhalla. Bhalla added that all those who banked on the land bank concept of investing in real estate are having very difficult times.

Having said that, Bhalla also believes that although raising funds have become difficult now, this is the best time for investing in the sector as valuations have reached the rock bottom levels and there are lesser options available for financing now. "Now that the real estate river has reached the bottom line, it will definitely find well hidden nuggets", said Bhalla.

Matrix partners in the U.K. raised an India focused fund and returned the money to investors. Since it has opened its shop in India, Blackstone Real Estate Partners has only managed to make one investment (Synergy Properties), the investors are increasingly cautious to invests in real estate, finding it safe to invest in individual projects and keep scouting for the same. Hopefully, they will also find the nuggets.