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Indian Realty Funds' Offshore Flight Hits Air Pocket

17 August, 2016

The flight to offshore fundraising by realty funds from the country is facing heavy headwinds. And fund managers are being forced to make emergency landing with revised targets as they have found few takers for their ambitious initiatives.

Some of the key players who are raising money overseas include JP Morgan,  Kotak Realty Fund, Ajay Piramal’s IndiaReit, ASK Property Investment  Advisors and Triangle Real Estate Fund, to name a few. But according to industry sources, quite a few of these, such as JP Morgan and construction biggie Shapoorji Pallonji’s Mauritius-registered real estate fund, have got poor response from the Limited Partners.

Shapoorji’s maiden offshore realty fund, launched in late 2010, is yet to see its first close and has not reached even one-fourth of its target of $500 million, according to sources privy to the development (more on that here). At the same time, JP Morgan’s proposed $500 million India-focused realty fund has cut the size by a third to $350 million, according to a source. “It was planning to close the fund by January but the fund is still open. The company has revised the plan to close it by March-end,” the person added on condition of anonymity.

An e-mail query sent to JP Morgan remained unanswered while Rajesh Agarwal, who is heading Shapoorji Pallonji’s realty fund, declined to comment on the latest situation, citing company policy. A questionnaire e-mailed to the Shapoorji Pallonji CIO Venkat Gopalkrishnan also went unanswered.

Amit Goenka, national director (capital transactions) at property consultancy Knight Frank India, says, “Some of the players who went out to raise money have abandoned their plans and come back. The market is very unfavourable and the good old days for big funds are over now. Firms are now targeting $300-400 million at best.”

In 2007, most of the funds had raised both domestic and offshore funds and had heavily invested in tier I, II and III towns. But the Indian realty story had gone bust with developers failing to clock sales and manage steady cash flows, and most of the international investors had burnt their fingers.

Since the global economic meltdown in 2008, most of the realty funds had begun striking deals in mezzanine or debt-structured investment format where offshore funds can only be used for equity stake investment in greenfield projects on a minimum project size of 25 acres. This makes investments through offshore funds riskier.

A director of a domestic realty fund, also on road to raise money, said on the condition of anonymity, “Things are not as hunky-dory as they used to be during 2007 when anyone could go and raise money by just narrating the real estate investment options in the country. Investors are very clear that they want to see successful exits in your portfolio before giving the money.”

However, some fund managers are optimistic about their prospects.

Making its maiden entry into the offshore market is Mumbai-based ASK Property Investment Advisors, which is planning to raise $250-300 million to invest in residential space in Mumbai, Pune, Bangalore, Chennai and Delhi.

Sunil Rohokale, CEO and managing director of the fund, has acknowledged that the journey will be difficult in the macro sense but it is not impossible. “Investors are still positive about the India story but they want more details of investment strategies and they are not looking at 7-10 year funds as before. Instead, they are keen to pursue medium-term funds, those with 5-7 year horizon. Also, they are ready to talk to selective managers and funds,” he said.

ASK Property Investment is targeting fund of funds, endowment and pension funds besides large family offices for its offshore fund. It is starting the fundraising process from the next quarter and aims to hit the first close of $100-150 million in the next 9-12 months.

IndiaReit and Kotak Realty are two other big domestic funds who are tapping the offshore markets. While IndiaReit fund aims to raise $500 million, Kotak Realty Fund is looking to scoop up $350 million for its second offshore fund.

According to a senior official who does not wish to be identified, it has been on road for the past three weeks. “We are looking at a combination of both new and old investors to invest in this fund. The fund will have a lifeline of seven year plus one,” he says, adding that it is planning to hit first close in May.

To be fair, it is not too bleak a picture either. Earlier this year, two funds successfully closed a domestic and an offshore fund, respectively. India Infoline Venture Capital Fund, the private equity arm of the India Infoline group, completed raising a Rs 500 crore fund dubbed IIFL Real Estate Fund (Domestic) Series I. Also, Red Fort Capital raised $500 million from overseas investors for its second real estate fund focused on residential properties. It was one of the most significant capital-raising from overseas investors for the real estate sector in more than three years.

Ambar Maheshwari, managing director (corporate finance) at international property consultancy Jones Lang LaSalle, says, “If the product offering and the on-ground team are good and they are backed by proper sponsors, there is a chance that they will be able to raise money.”

According to him, “Investors are still looking for internal rate of returns in the range of 25 per cent. Although most of the offshore investment exits are still awaited, new investors want to see good exits demonstrated by funds for considering new investments.”

Also Read:

India-focused Realty Funds Eyeing $5.3B; Would They Hit Jackpot?


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Indian Realty Funds' Offshore Flight Hits Air Pocket

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