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PE investments in real estate decline 42% in first half of 2016

( 13:36, 04-Jul-16)

PE funds channelled $954 million into realty projects in Jan-Jun, compared to $1.66 billion in the same period in 2015

Despite the falling numbers, the outlook for this year, especially in the office sector, is positive with two of the biggest PE investments in the Indian office space totalling $3 billion in the works. Photo: Ramesh Pathania/Mint

Private equity (PE) investments in Indian real estate dropped 42% in the six months ended 30 June from a year earlier, as the supply of quality new projects dried up because of a persistent slowdown in home sales.

PE funds invested about $954 million in real estate projects from January to June this year, compared to $1.66 billion in the same period in 2015, according to data by investment-tracker VCCEdge and Mint research.

Large builders have stayed away from starting new housing projects, resulting in a lot of capital chasing a few good quality projects and pushing fund managers to look for refinancing.

“The number of deals has slowed down because there are not many project launches and developers primarily need money to finish projects or refinance loans,” said Diwakar Rana, managing director, capital markets, India, Cushman & Wakefield, a property advisory. “It is a situation where investors are ready to write large cheques but there are not many opportunities available.”

The outlook for 2016, particularly in the office sector, is positive with two of the biggest private equity investments in office space in India totalling $3 billion in the works. Canada’s Brookfield Asset Management Inc. is at an advanced stage of investing $1 billion to buy out 4.5 million office and retail assets of Hiranandani Developers Pvt. Ltd in the Mumbai suburb of Powai and DLF is in the process of selling a 40% stake in its rental assets arm to private equity investors raise about $2 billion.

The two biggest deals this year were in the retail sector. Blackstone Group Lp agreed to buy 1 million sq. ft of retail space in L&T Realty Ltd’s Seawoods project in Navi Mumbai for Rs.1,450 crore and sovereign wealth fund GIC Pte Ltd is buying a 49% stake in Viviana mall in the Thane area, near Mumbai, at an enterprise value of about Rs.1,300 crore. The actual investment by GIC couldn’t be ascertained.

Blackstone also invested Rs.470 crore to fund Bengaluru-based Salarpuria Sattva Group’s 6.6 million sq. ft under-construction and partly leased project in Hyderabad, its first investment in the city.

Among domestic funds, Piramal Fund Management Pvt. Ltd invested Rs.425 crore in a central Mumbai project, Lodha Azzuro, constructed by Lodha Developers Pvt. Ltd through the structured debt route, marking the first deal between the country’s largest developer and one of the largest real estate investors in the country.

Piramal, which has been wary of the National Capital Region, invested Rs.200 crore in two projects of the Prateek Group in Noida. “We have been doing different deals, mostly with developers with whom we already have existing relationships. We are adding new customers, but the pace is slow and this is because big developers have mostly slowed down on new projects,” said Khushru Jijina, managing director, Piramal Fund Management.

The nature of investments in real estate is mostly in the form of debt and structured debt, with very little growth capital available from investors, who aren’t willing to take much risk.

In residential, it is actually the same inventory of projects that are getting financed and refinanced with little fresh stock coming in.

“Debt can only work to an extent. Leveraging beyond a limit doesn’t make sense, unless there is enough cash flow cover. On-ground project activity has still not taken off, leading to weak cash flows, and fundamentally, the developer’s business needs to generate cash to encourage external investors to participate,” said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.

Despite the three-year slowdown, investors are seeing recovery in some micro-markets.

ASK Property Advisors, which has mostly done pure equity deals, is planning to raise a new structured equity fund this year. “There is demand for money which is patient, at a price which is risk-adjusted, and offers flexibility. Today, developers are busy servicing loans on a quarterly basis, putting pressure on their projects and construction pace. We want to give them that breathing time, so they can finish their projects, and then give us a profit share,” said Sunil Rohokale, chief executive and managing director of ASK Group.

ASK Group will invest from its Rs.1375 crore equity fund, some foreign money it has previously raised and a structured equity fund it will raise this year.

Source - Mint

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