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Recap 2012: PE funding in real estate shrinks to 3-year low at $1.1B

11 January, 2013

The Indian real estate industry is yet to see a meaningful resurgence after a demand slowdown hit the developers in 2008-09, affecting all segments of the market. Although developers maintain that the worst is behind them and with the interest rate regime turning soft, a demand uptick seems to be around the corner. But private equity investors are not yet ready for a long-term bet on the sector.

Industry data culled from VCCEdge, the financial research platform of VCCircle, indicated that private equity funding hit a three-year low in 2012, with announced value of deals pegged at just about $1.1 billion across 48 transactions. This is the lowest since 2009 when the sector saw deals worth sub-$1 billion and a far cry from the bull market when $4-5 billion worth of transactions were recorded annually during CY2007 and CY2008.

In 2011, deals worth $1.48 billion were struck, according to VCCEdge.

One key difference between the current year and the previous calendar year is the money attracted by specific segments in the realty space. Last year, the traction was more in the residential real estate asset class, but over the past 12 months, realty funds focused more on acquiring commercial office space/IT parks.

Ambar Maheshwari, managing director (corporate finance) at the property consultant Jones Lang LaSalle India, said, “This year has been lacklustre for the private equity space and most of the funding has come in the form of debt funding from domestic money and non-banking financial institutions (NBFCs). We had anticipated some key exits to happen, but even those haven’t taken place. It has been one of the worst performing year by PEs in the Indian realty space.”

Factors affecting the investments in the realty market included the country’s macroeconomy and the fact that much of previous PE investments happened during the bull run at high valuations and exits at a profit had been elusive.

“Some of the existing investors who have burnt their hands pretty badly aren’t coming back anymore. It is the new set of investors who will come in and derive value from here on,” added Maheshwari.

Fundraising woes

Besides the lacklustre market for investments, the industry also faced the scarcity of new capital which could have helped in future investments as realty fund managers struggled to raise fresh funds.

However, a few funds did manage to raise money this year including Piramal Enterprises-backed IndiaReit Advisor’s Mumbai Redevelopment Fund (Rs 430 crore), Ascendas India Trust, which is raising $100 million to invest in commercial assets, and India Infoline which scooped up Rs 500 crore.

The two biggest fundraising activities includes the final close of Red Fort Capital’s second offshore fund where it raised $500 million at the beginning of the year and a domestic fund worth Rs 1,000 crore, raised by ASK Property Investment Advisors, to invest in the residential space through pure equity transactions.

Sunil Rohokale, CEO & managing director of ASK Investment Holdings, said, “The new money raised in 2012 is not as much as the money raised in the previous years by fund houses.” According to him, the new alternative investment funds regulations, which made it mandatory for local investors to invest at least Rs 1 crore for participation in domestic funds, hit the fundraising activity.

Requesting anonymity, a realty fund manager says even though things have changed and developers are now making projects which meet the demands of PE players, dry powder is the concern right now. “Most of the funds have either exhausted their life line or fund LPs have rewinded their commitments. So some funds have raised new money but the overall quantum available for future investments is not enough,” he added.

Others say LPs are looking to re-invest with their existing GPs with proven returns. Those looking to raise FDI-compliant funds are facing a challenge as the risk-adjusted returns in the Indian market is not attractive enough, compared to the US and other markets.

With equity investments lagging, NBFCs milk realty

One segment of funding which ruled in 2012 happened to be the non-banking financial companies (NBFCs). Anuj Nagpal, co-head (investment advisory) at DTZ International Property Advisors Pvt Ltd, said, “This year, most of the transactions have been replacements of bank debts with those of NBFCs. Although NBFCs are financing most of these transactions, the ticket sizes are smaller. So the total value of investments is less this year.”

(Edited by Sanghamitra Mandal)


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Recap 2012: PE funding in real estate shrinks to 3-year low at $1.1B

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