Southern real estate major Embassy Property Developments Ltd is holding talks with Singapore's Temasek and HDFC Property Ventures for private equity placement topping $100 million even as the Bangalore headquartered developer is working on an initial public offer (IPO) in 2011.

Banking sources familiar with the development said, Temasek could be co-investing with HDFC Property Ventures, which has made three large project level investments with Embassy in the past. Temasek is an investor in the $800-million HDFC fund and has the option of investing along with it.

Jitendra Virwani-led Embassy filed for an ambitious Rs 2,400 crore (or $520 million) IPO with the Securities Exchange Board of India (SEBI) last month, and appointed investment banks UBS, Citigroup, Nomura and Edelweiss for the public issue that most probably will hit the market next year.

Embassy Chief Financial Officer Gopinath AT declined to comment, when contacted. Phone calls and text messages to its Chairman Virwani over the weekend did not elicit any response. A Temasek spokesperson declined to comment on speculation. An HDFC spokesperson said that officials were not available for comments.

The firm has developed over 24 million sqft of real estate (including the share of joint development partners and others) and manage economic interests from a substantial part of what it owns (rather than opting for outright sale). The portfolio is skewed towards large business parks (like the 6.12 million sqft Embassy Golf Links) and SEZs even though residential, retail and hospitality verticals are now beginning to fill up the revenue streams.

It is not certain whether ongoing talks with Temasek and HDFC arm for entity level investment would be classified as pre-IPO placements given the fact that the company had disclosed plans for raising Rs 1,175 crore through this route in its recent regulatory filings. The valuation of Embassy, assuming the upper end of pre-IPO fundraise and shares to be issued, could be $4.25 billion or Rs 19,889 crore on a pre-money basis.

One industry source said HDFC Property Ventures was also infusing investments into Embassy's proposed luxury villa project around Devanahalli near the Bangalore International Airport, which was part of  re-arranging its investments at Embassy before the IPO. HDFC was shifting some of its SPV investments to the new ventures, like the Devanahalli lifestyle development, which will also attract a part of the public issue proceeds.

In 2009, HDFC Fund and Temasek had discussed the possibility of Rs 600 crore investment into rival real estate developer Prestige Estates Ltd, which has been readied for an IPO as early as September this year.

Embassy reported revenues of Rs 383 crore with a net loss of Rs 3.5 crore for the 11 month period ending February 2010. The lack of sizeable presence in residential segment and dependence on lease rentals rather than outright sale of developed space has limited Embassy's topline potential despite its size. Out of the developed commercial area of 18.73 million sq. ft., 7.36 million sq. ft is Embassy's economic interest. Out of 5.6 million sq. ft. residential area developed, around 1.6 million sq. ft. is held as economic interest.

Of the Rs 2,400 crore issue, Embassy plans to use around Rs 803 crore to invest in ongoing projects, Rs 685 crore in various subsidiaries and around Rs 123 crore pay loans (including loans of subsidiaries).

HDFC raised one of the largest real estate funds in India at $800 million called HIREF International LLC. Its investments include a realty project of Lodha Developers, another realty firm which has filed for an IPO. Temasek made its first direct investment in Indian real estate earlier this year by picking up a 4% stake in Sobha Developers. Temasek, whose realty investments are mainly driven out of Singapore, has investments in one of the largest Asian real estate firm CapitaLand.

A host of developers have filed with SEBI for IPOs but have held back due to the weak sentiment. Developers like Emaar MGF, BPTP, Lodha Developers, Sahara Prime, Prestige Estates, are some of the other players who have filed for public offerings. Recent reports have said that Emaar MGF has cut the size of its issue by half.

Private equity deals have revived this year but are still few as compared to 2007-08 as investors now try to drive hard bargains. From January till the end of July 2010, there were 18 deals in the Indian realty space with a disclosed value of $441 million as compared to 10 deals with a value of $188 million in the same period last year, according to VCCEdge.

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