24 Mar 2015 14:57 IST

PE deals in real estate hit multi-year high despite sluggish market

Investments in 2014 stood at ₹15,410 crore, more than double that in the previous year

The property market in many cities is in doldrums with sluggish demand and languishing prices. But real estate private equity funds are making a beeline for real estate. PE deals in the realty sector – both investments as well as exits – are increasing

PE funds invested ₹5,930 crore and ₹5,480 crore in the third and fourth quarter of 2014 respectively – the highest since 2008. For the full year in 2014, investments were ₹15,410 crore – more than double the amount invested in 2013. Investments were in both residential and commercial segment.

Many private equity funds were also able to make exits in the recent past. For instance, Milestone Capital, a real estate private equity fund, profitably exited four commercial and one residential project in 2014. The investments were made five-six years ago. The commercial investments returned around 1.5 times (including rents and capital appreciation) while the residential project return was 2.3 times. Likewise ASK Property Investment Advisors, which focuses on equity funding to residential projects, exited from its ₹37 crore Pune property investments (made in late 2010) with a return of 2.3 times.

Unique opportunity

Money flow continues to be robust in 2015 with 10 deals worth $500 million concluded so far, as per data from Venture Intelligence, a research service focussed on Private Equity and M&A. This is a fourth of the investments during the entire year in 2014. The surge in investments is largely due to insatiable demand for cash from real estate companies that are in dire straits due to declining sales and debt service obligations. Some PE debt funds, known as mezzanine funds, lend to these companies at 20 per cent rate of interest. “The funds are betting that as the economy picks up and home loan rates fall, buyers will return to the market and builders will repay their loans”, says Amit Bhagat, MD & CEO, ASK Property Investment Advisors. Investors are also seeing the slowdown as a cyclical event rather than a structural issue observes Gaurav Kumar, Co-Head Capital Markets, CBRE South Asia, a real estate research firm. “The long term outlook for the housing market is positive, given the country’s demographics”, he says. So investors are taking the opportunity but budgeting for a slow revival by accepting a flexible principle and interest repayment schedules. PE funds that put money in rent giving commercial properties such as IT parks and malls are pinning their hopes on Real estate investment trusts (REITs) to help them get an exit by buying these properties. “In a falling interest rate cycle, rent giving properties offer good scope for capital appreciation”, says Rubi Arya, Vice Chairman and Director, Milestone Capital Advisors.

Shift to equity

With more confidence on the ability of developers to complete residential projects, funds are more open to deploy their capital in the form of equity rather than debt. And this shift may be good for developers given they are highly leveraged notes Bhagat.

It may also be good for home buyers. “Unlike PE investments in other sectors, real estate funds do not play an active role, especially when giving debt funding to big brand developers”, says Thillai Rajan Annamalai, Associate Professor, Department of Management Studies IIT Madras.

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