The Indian real estate industry attracted major inflow of private equity money during the boom years of 2006-07. Now, as the tenure of those investments mature even as almost all development projects are way behind schedule, the spectre of having to buyback the investors with promised returns or seek a new financial investor to do so has come to haunt realtors. Cash strapped firms weighed under a debt pile-up are seeking the solace of secondary PE deals to pay back their original investors. The big question is will PE investors buy the story?

Initial indicators are none too flattering. After two such deals last year-- Blackstone buying out HDFC private equity’s stake in Manyata Business Park in Bangalore and Tata Realty Initiative Fund providing an exit to Kotak Realty Fund in Peepul Tree Properties Pvt Ltd—the industry has drawn a big blank.According to the data available with VCCEdge, the financial research platform of VCCircle, no private equity funds have struck a secondary deal in the realty space in last six months.

“There is a fund crunch and any investor coming in at this point in time is asking for higher returns than the one who is marking his exit,” according to the real estate research head at an international brokerage who preferred anonymity.

According to him, developers are facing capital issues and though a lot of fresh PE deals have happened in last two months, investors are still resistant towards entering into deals where there is less scope for providing returns to their limited partners.

The genesis of the problem lies in project delays due to the economic slowdown. As projects are running behind schedule cash-flow has got strained. For instance in the residential projects space, banks would not disburse money to the realtor as project milestones are not reached while in the case of commercial properties project delay means late occupation and thereby delayed rental income.

Fraction of the realty industry is still betting that secondary deals will roll up the ladder in next few months.

Amit Goenka, national director-capital transactions at property consultancy firm Knight Frank India, says, “Those projects which were launched in 2007 and had got private equity investment failed to take off due to lot of issues. But now, when existing investors have to exit, the projects have started developing. The secondary investors should not mind entering at this point of time since there is clarity on the completion of these projects."

This could prove to be critical as most of the investments were with a four year horizon with an additional window of two years. At the project level special purpose vehicles(SPVs) many investment deals had a clause of buyback or conversion into equity whereby the PE investor would have virtually gained control of the project if the promoters failed to buyback or provide an alternate exit route with assured returns.

Industry experts say secondary deals would be one of the favoured transaction route due to two factors. First, the value of land, despite economic slowdown and slump in sales, has appreciated promising the new investors better returns on their investments. Secondly, demand is expected to pick up as the general consensus is that interest rates have peaked out and with softening inflation, the central bank would cut rates sooner than late.

A senior realty fund head who did not wish to be identified, said, “Year 2014 is the time when most of the funds will see an end of their life cycles. Projects where promoters have been able to demonstrate execution and register sales to some extent are seen as a low risk low return investment.”

“These investments make sound economic rationale for the new entrant too and increasing number of funds are interested in such deals as very few launches mean dearth of investment opportunities,” the fund manager said.

Given the quantum of money expected to churn due to investment terms maturing soon, secondary PE deals could play a role of a ventilator in the Indian realty market.

Shobhit Agarwal, joint managing director (Capital Markets) for property consultancy Jones Lang LaSalle India, says, “We believe that there will be more secondary deals and we expect exits worth more than $2 billion to happen this year.”

Realtors and early investors would hope so too.

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