"PE Investors In Real Estate Pushing For Mezzanine Structures"

Private equity action in real estate has hit a snag. But such trends are being considered as a consequence of global sentiments, which are not necessarily too strong to support the cyclical nature of the business. As investors are now cautious about making new investments in this space, they prefer to take a safer route – a mezzanine structure which offers some downside protection. In an exclusive video interview with VCCircle, Ravindra Pai, MD of Century Real Estate, talks about investors’ concerns and what lies ahead. The real estate company is in talks with PE investors to raise about Rs 500 crore. Pai says that they are hopeful to close a transaction within the next three months. Excerpts:

Recently, we have not seen much private equity investment activity in the real estate space. How would you explain it?

Pai: I think that the funds are really struggling to determine the right way to make these investments. Any activity in this sector has a very long gestation period, which means it takes a long time for projects to mature. As you know, funds have their own cycles, typically spanning two-three years. On the other hand, real estate projects can take longer; small projects may take around three-five years while larger projects take around five-eight years. So, it is always a challenge to manage fund expectation from a life cycle perspective and a project life cycle perspective.

What we have seen during the last six-eight months is that private equity, in its true sense, doesn’t exist in real estate. Funds are very happy to invest more on a structured transaction basis where they are looking at some downside protection.

Private equity funds have been struggling to raise funds over the past three years, but the problem appears to be acute in case of real estate-focused PE funds. What are the key concerns in this space?

Pai: I think it’s largely sentiments. Historically, nobody has made money in real estate. There have been many companies who went public and you now find most of them trading at 30 per cent below their list price. There is also an angle of transparency which continues to plague the industry. There is some discount that the industry takes due to the lack of corporate governance. Thirdly, real estate is a cyclical business with many ups and downs. I think we are going through a cycle where global sentiments are not necessarily strong. So, all things combined, it is taking a toll in the real estate sector.

What are the structures that the investors are exploring?

Pai: We have found that investors want some sort of downside protection. They want to make sure that there is some debt-style protection. They are more interested in a mezzanine or structured kind of transaction.

You have recently raised money via non-convertible debentures (NCDs). Would you be exploring the same route to raise fund in the future?

Pai: At this point of time, we are more open to doing an equity kind of transaction. We are quite aware how much debt we hold in our books. So, we don’t want to over-leverage the balance sheet.

How much are you looking to raise?

Pai: We are actually in talks with private equity investors to raise up to Rs 500- Rs 550 crore primary for pre-development. We have already identified land parcels where acquisition is over and these are now ready for pre-development. But it’s going to be very difficult to get this capital from traditional sources. For instance, banks are not willing to invest unless project approvals are in place. But you actually need huge investments to get those large projects to the approval stage. Therefore, we are looking to raise money to be spent in these development areas – so that we can create an inventory worth Rs 4,000-Rs 5,000 crore.

So, when will you be able to raise money?

Pai: In three months’ time, I should think. We have made significant progress from the diligence perspective. So, we are pretty much there. Currently, we are thrashing out the finer points and trying to determine who will be the right partner to invest in.

What are your expansion plans?

Pai: We have been in this business for nearly 35 years now and consequently, own very large land banks at historical costs. In fact, we only have prime land parcels, which is an added advantage. We have been able to pass some of these historical costs to customers in the sense that our pricing is very competitive and aggressive. Going forward, we propose to create destinations and townships – so it will be more integrated sort of investment.

What about the real estate prices from a consumer’s point of view? What can we expect?

Pai: From a retail buyer's point of view, I would say that if you are buying a home, there’s no good time as such. I think every time is a good time. In my limited experience, I have not seen prices coming down. There might be a certain freeze on transactions, but prices never really come down. Or at least, that’s what I believe. I hear that Mumbai and Delhi are overheated and there is some pressure in terms of pricing and absorption. But in Bangalore, we have not seen anything so far. The good thing and the bad thing is that, prices did not scale up as they did in other cities.

(Transcribed by Bhawna Gupta)

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