Bangalore-based Puravankara Developers is looking for private equity investors for its affordable-housing subsidiary, Provident Housing and Infrastructure.
However, it is avoiding the same for the parent company due to the high demands of private equity players.
Ravi Ramu, director, Puravankara Developers said, “Today, private equity investors ask for an assured internal rate of return (IRR) of more than 20%, which is very high. Thus, we are very cautious before we bring in any private equity player into our parent company. However, we are in talks with international and national players to raise Rs 750 crore for mid-segment housing projects, which is favourable in this market situation.”
Somewhat predictably, the difficulty faced by real estate companies in raising funds from banks has strengthened the hands of private equity players.
The new trend has emerged in private investments of around $7.6 billion in Indian realty over the last year or so.
And private equity investors are calling the shots on the returns on investment, looking at the tightening monetary policy.
So much so, Ashish Bhalla, managing director of Millennium Spire India said, “Realty has started to slowly trickle over from a speculative to stable investment for us.”
Many private equity deals in India are structured with assured returns varying between 20% and 25% to protect the investor's risk and reduce the level of valuation disagreement between developers and investors.
A top-rung developer, however, said the guaranteed return is possible only from smaller developers since PE funds can easily dictate terms to them. “That is highly unlikely with bigger players.”
Developers pay an interest of around 12-13% on their outstanding debt, which is significantly lower than diluting stake in special purpose vehicle (SPV) projects with assured returns of more than 20% on the investment.
However, lately it has become “extremely difficult” to raise funds for new projects from banks due to stricter norms introduced by the regulator. Hence the need for private equity funds.
Interestingly, the guaranteed returns make most of these investments resemble structured debt rather than equity.
Ajoy Veer Kapoor, managing director at Saffron Asset Advisors said, “Assured return is not a new trend. It has always been practised by good private equity firms. But now, every PE player is ensuring that. It is called the 'preferred return' structure.”
But some believe the number of such deals is set to reduce, what with top-tier developers also trying to raise capital.
“Even though deal flow has increased substantially in the last three months, the number of transactions achieving closure might slow down considerably in the second half on increasing macro concerns,” JP Morgan said in a note to clients.
In the first quarter of this fiscal, a host of developers including DLF, Unitech, Ansal API, Parsvnath and Anant Raj Industries have raised funds to part-fund their ongoing projects.
A spokesperson of New-Delhi based Ansal said, “Raising funds through private equity is a viable option for many developers, including us.” Ansal plans to dilute 30% stake to private equity investors for its 2,500 acre integrated township, The Megapolis, near Greater Noida in Uttar Pradesh.
Source: Sify