Real estate developers are depending heavily on private equity (PE) funds to bail them out to make payments for old land acquisitions and to kick off projects at the land-buying stage.
With bank loans drying up and cash flows under stress due to dipping sales, PE money seems to be the only source of relief.
Two Mumbai-based firms, DB Realty Ltd and Ackruti City Ltd, need to pay up a premium of Rs.802 crore and Rs.330 crore, respectively, in February for the redevelopment of the high-profile Bandra Government Colony project in the city that was allotted to them by the state government last year.
The land premium that was to be paid in September 2010 was pushed to February this year according to a 28 January report by Anand Rathi Financial Services Ltd.
Both the developers have said that they will need to raise money to make the payments.
An Ackruti City spokesperson told Mint that the company would evaluate options including PE funds and debt to pay off the premium.
DB Realty, in an analyst presentation, said that it wants to raise Rs.1,200 crore by diluting a 20% stake in the project.
“With revenues falling, builders are increasingly finding it difficult to pay for land that they have already bought and are thereby deferring payments,” said Gulam Zia, national director, research and capital advisory services, Knight Frank India, a property advisory. “For lack of funds, land transactions are also falling through or being put on hold across the board.”
Zia added that firms that have already committed to expensive land deals and have issued optimistic sale projections are in a bind, unable to renegotiate the agreements.
Indiareit Fund Advisors Pvt. Ltd is evaluating investment opportunities on this front in Mumbai, Pune and Bangalore to deploy about Rs.250-300 crore.
Ramesh Jogani, managing director and chief executive of Indiareit, said that the demand is on three counts—one, to pay off old land acquisition commitments, two, funding at the early, land stage of a project and three, to repay debt.
“If it makes commercial sense to us, we would look at all of them,” he said.
Kotak Realty Fund’s chief executive S. Sriniwasan said that if a PE fund asks for 18-22% equity return at the execution stage of a project, it goes up to 26% when a fund enters at the land stage.
“There are a lot of enquiries on investing for land payment but these are high-risk propositions with a lot of uncertainty in terms of approvals in markets such as Mumbai,” said Sriniwasan.
Property analysts said that developers are willing to pay higher returns.
“Funds are asking for as high as 30% guaranteed returns against such investments, almost as stringent as bank loans,” said Amit Goenka, national director, capital transactions, Knight Frank India.
Land sales, particularly in Mumbai and Delhi-National Capital Region (NCR) are drying up. The most recent example of a sale that got aborted is that of the 108-acre Bayer CropScience Ltd plot in Thane, near Mumbai, valued at over Rs.1,000 crore. While DB Realty was close to clinching the deal, it fell through because the price couldn’t be agreed upon.
Bangalore realty firms, which refrained from aggressive land purchases last year, are, however, preparing to build inventory and hence, are eyeing PE money.
This year, Kotak invested about Rs.100 crore in Total Environment Building Systems Pvt. Ltd to buy a land parcel in south Bangalore.
Century Real Estate Holdings Pvt. Ltd, another Bangalore property firm, wants to raise about Rs.700 crore from funds for early stage investments in projects. “We need pre-development funding so that the projects can be jumpstarted,” said Ravindra Pai, managing director, Century Real Estate. “It is expensive money but there are many risks involved in markets such as Bangalore where you don’t get clean land and acquisition is difficult.”
Source: Livemint