Bangalore-based mid-sized real estate company Adarsh Developers is close to clinching a deal with Kotak Realty Fund for an investment of up to Rs 150 crore into one of its upscale residential projects, Palm Retreat, which is coming up on the city’s Outer Ring Road stretch, close to many IT campuses such as Intel and Wipro.
Palm Retreat project is a combination of row houses, which will come up on a 75-acre patch, and 2,040 high-rise apartments in the premium home segment. Adarsh Developers is known for its signature Palm Meadows project, located in Bangalore’s IT suburb Whitefield, which mirrors gated communities in the US and houses many expat CEOs and corporate honchos in the city.
ICICI Prudential was another investor holding discussions to invest in the Palm Retreat project, but Kotak appears to be closer to clinch the transaction. The residential project has multiple phases, with the row houses coming up initially.
A banking source said, Kotak Realty has issued a term-sheet for a structured financing deal, possibly mezzanine financing, estimated at Rs 120-150 crore. Mezzanine financing is a hybrid of debt and equity where the investor is assured a fixed return and converts the rights to equity only if the financing covenants are not being met.
Mezzanine financing also becomes attractive for a company where promoters have no short-medium term plans for an IPO.
One fund manager, who did not wish to be quoted, said several private equity deals in the real estate sector were primarily through hybrid instruments, or primarily debt, at the project (read SPV) level. The attractiveness of project or SPV-based funding in the real estate segment stems from the fact that risks are limited to the project level and exits are linked to sales.
In May 2009, Sobha Developers, another Bangalore-based realtor, raised Rs 225 crore from PE fund Purna Partners for investments to be made at the SPV level.
An email sent to Adarsh Group chairman and managing director B M Jayeshankar, seeking a confirmation on the development, elicited no response at the time of filing this story. But, information on the Adarsh website, elaborating on future growth, says, “we will come up with investor-backed projects in the near future.” The group has developed over 5 million sq feet and is present in the residential, commercial, hospitality and SEZ segments. A senior Kotak Private Equity official was unavailable for comment at the time of posting this report.
Kotak Realty Funds Group is a subsidiary of Kotak Investment Advisors Ltd, which manages Kotak Mahindra Bank's alternate assets businesses. It set up one of India's first real estate funds with a corpus of $800 million in 2005. Its portfolio of investments includes Lemon Tree Hotels, Lalit Gangadhar Contructs, Sunteck Realty, StarLight Developers and Ackruti City's slum rehabilitation project in Mumbai.
Interestingly, Kotak PE’s interest in Adarsh Group’s luxury project comes at a time when most high-end developers in Bangalore have re-engineered their plans to target the sub-Rs 40 lakh market. The buzzword last year was affordable housing but, real estate observers feel, developers will shift the focus back to the luxury segment once they see signs of an uptick in sales.
A city-based real estate tracker, who did not wish to be identified, says, “the market is beginning to pick up. The last quarter was particularly bullish for some developers, who have a huge inventory of semi-finished and finished units in Bangalore. We will see the real picture in the weeks to come as most customers avoid making a buying decision in the inauspicious December 15-January 15 period.”
In response to a massive slowdown in offtake of premium offerings last year, many high-end realtors in the city such as Nitesh Estates, Sobha, Mantri, Shriram and Purvankara announced plans to enter the “affordable” housing market in a big way.