Why SPV Is A Preferred Route For Real Estate Investors

By Shrija Agrawal

  • 12 Aug 2008

As the Reserve Bank of India has been tightening the lending screws on the real estate sector, special purpose vehicles have become a preferred route to raise money for real estate companies from private equity players. “Private equity players find it safer to invest in projects rather than a developer. A lot of developers are also finding easy that way. Once a private equity fund enters, the project suddenly becomes viable because it has the money to execute,” said Ashish Bhalla, Managing Director of Millennium Spire India Management, a real estate investment firm. In about 26 deals real estate deals in the first quarter of 2008, about 19 deals have been done via SPV’s.

Look at some of the recent SPV deals. Sun Apollo Ventures has closed a $76 million deal in the SPV of Amrapali Group, which is developing a 200-acre township in Jaipur, and a 15-acre high-end housing project in Noida. Similarly, TAIB Bank is investing $50.44 million for a 26 per cent stake in the SPV of Anant Raj Industries, while Lehman Brothers Real Estate Partners is acquiring a 50 per cent stake in Unitech’s Mumbai project. (See a list of major SPV deals).

Liquidity Pressures


Declining internal accruals and reduced funding options is putting pressure on the sector. Adding to the woes are the recent measures of Reserve Bank of India such as raising the repo rate and cash reserve ratio. Already banks have raised their prime lending rates, and the residential demand is likely to get hit, said industry observers. “Even if the developer now takes loan which is difficult to get anyways, where is the assurance that buyer is there,” Bhalla asked.

Real estate players are already grappling with dwindling sales, correction in land prices, tepid demand, and rising input costs, even as they face a liquidity squeeze. The developers are now looking at other sources of funds, and they find no other option than to raise money from PE players for particular projects, because the situation out there is extremely scary.

“Most mid size developers, be it at the regional levels have taken over a lot of load. All these people have got more projects than they can execute. They have more agreements to buy land than they have money for. They have applied for licenses but have no money for licensing fee and construction,” says Bhalla. And in a market where sales are being restricted to genuine investor and to some extent cautious investors, there isn’t much liquidity for the real estate which was getting all the investors’ attention earlier. Bhalla added that all those who banked on the land bank concept of investing in real estate are having very difficult times.


Not withstanding huge debt on its books, Parsvnath Developers, a mid-sized real estate developer is considering stake sale in individual projects. The company is currently carrying debt of about 17 billion rupees and is looking at equity dilution in its its SEZ (special economic zone) and hotel projects.

Also, Unitech is planning to raise $1bn from private equity investors for individual projects and will float SPV’s for its hotel and realty projects.

However, in the recent past, there have been a few investments where investors have picked up stakes in developers at entity level. India Bulls Real Estate owns 50 per cent shareholding in Kenneth Builders & Developers, a South Delhi based developr. It also acquired 100 percent in Noble Realtors. And about 90 per cent stake in Dev Property Developers (DPD), for about Rs 1,100 crore. DE Shaw made an equity investment of $250 million (Rs 1,000 crore) in Mack Star Marketing, a unit of Mumbai-based public listed real estate developer Housing Development & Infrastructure (HDIL). DLF Assets raised $450 million from Symphony Capital. ICICI Venture invested Rs 227 crore in Indore Entertainment World for picking up a 14 per cent stake in the, a wholly-owned arm of EWDPL . But the trend has been changing of late and the investors prefer to invest at the project level rather than entity level.


“We always invest at a project level as we see more value in it. Also, it is a higher return game investing at the project level because if I invest say in a developer, I pay a fee and my returns are reduced to that extent”, said Sanjeeva Shivesh, Executive Director, Fire Capital.

Bhalla also believes that although raising funds have become difficult now, this is the best time for investing in the sector as valuations have reached the rock bottom levels and there are lesser options available for financing now. “Now that the real estate pit has reached the bottom, we can definitely find a few hidden pearls,” said another investor.

Since it has opened its shop in India, Blackstone Real Estate Partners has only managed to make one investment (Synergy Properties). It appears that the investors are increasingly cautious to invest in real estate, finding it safe to invest in individual projects and keep scouting for the same. Now it’s time to build a real estate company SPV by SPV.


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