India’s realty sector, which was the worst-hit in the global economic slowdown, has, in the last year or so, slowly limped back to normalcy given the demand pickup in both residential and office space. But, on the stock market side, the road to recovery is getting longer as over a dozen real estate players including Lavasa Corporation, Kumar Urban Development, Lodha Developers, Neptune Group, BPTP, Ambience and Emaar MGF ( (with a potential to raise close to Rs 10,000 crore) wait for market sentiments to improve. While the realty sector is witnessing some success in attracting funding through the PE route, stock markets may be out of bounds for now. In 2010, there have been 37 private equity deals with disclosed value of $1,182 million in real estate compared to 24 deals worth $606 million last year. International property consultant Jones Lang LaSalle Meghraj joint managing director (capital markets) Shobhit Agarwal predicts a sort of revival in private equity investments in the real estate. Agarwal, who advises on acquisition and structuring real estate investment transactions for real estate investors and development companies, talks to VCCircle on the current realty IPO environment, sub-segments that are ticking and increased possibility of PE play given tighentening of conventional financing options. Excerpts:-
What is your assessment of the realty IPO environment given the recent loan scam? Do you think this could make firms defer their market outing?
The loan scam is largely a bribery issue and the direct effect of it on the real estate and the banking sectors is yet to be established. However, it has certainly dampened market sentiments, especially for real estate stocks, which have seen drop in prices with the highlighting of the loan and land scams. It is very probable that some of the realty players who were prepared to go the IPO route may postpone their plans and await a more conducive time.
Most of the private equity into real estate had gone in at the project rather than the entity level. For these players, the actual volumes, dependent on the economic environment as a whole, matter more than the sentiments which drive the stock exchanges and thereby the stock prices. For those few players who had invested at the entity level of the companies with IPOs as the sole exit route, there might be more waiting in store.
Will the situation be a blessing in disguise for the PE firms? Do developers approach PEs to tide over the liquidity crunch or will they sell space at a discount?
As a result of the loan scam, the debt market may become more restrictive and the screening process will be tightened. In such a scenario, some realty players may feel a liquidity crunch. With the IPO route currently being a doubtful one in terms of meeting their expectations for raising capital, they may turn to private equity. In other words, we may see new PE investments – but these will be defined by great caution and selectiveness in terms of players.
Do you expect a PE revival in realty sector?
A lot of new capital has been raised for real estate and the long-term outlook, keeping in mind the latent demand, is positive for the sector. We are very likely to see considerable capital infusion into real estate projects going forward. However, the source may not only be private equity alone but may involve other institutions such as NBFC, which are also lending to real estate players.
Realty players are liquidating their land assets to deleverage their balance sheet. Is there a lot of stock in the market for sale?
Very few realty players with high leverage on their books are looking to sell land. Those that are doing so constitute only a small subset of the overall corpus. In fact, many players are aggressively buying land, since land is the basis of their future projects. For example, almost all Mumbai-based players are actively scouting for land.
PE firms turning developers, do you see an uptick in the trend?
Some private equity firms are entering the development arena – or, to be more accurate, are developing their capabilities in this field. They will certainly emerge as new entrants going forward. However, their numbers are small – most funds prefer to remain pure financial players.
Do you think the luxury market is back? What is the PE funding outlook for affordable housing?
There was a momentary revival in the luxury residential market. However, the volumes have reduced again. Affordable housing is always an enticing vertical, taking into consideration the huge demand for it. However, it is a fact that the returns are lower. The dilemma for private equity funds is how to make investments in affordable housing projects and still get higher returns .
While investing in real estate, what kind of geographies do PEs prefer? The investment comes in which sector – residential, office or commercial?
There is always a demand for Tier 1 cities with an exception of Pune. Tier 1 cities have become more affordable now as the prices have come down by 30% from the peak. Most of the funds like to invest in projects in Mumbai, Pune, Delhi with NCR, Chennai, Banglore and Kolkota.
In real estate, 75% of the projects come up in residential sector. There is no exact data available to assess the flow of funding. But most of the funding happens at residential projects. This year we expect over 50 PE transactions in the real estate sector. That is not a big number compared to the size of the country.
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