Private equity (PE) capital infusion into Indian real estate dropped by almost 36% between January and March from a year earlier, as funds opt to spread their risks and invest in smaller deals.
PE funds invested $279.53 million across 12 real estate deals in the first three months of this year, compared with $431.9 million across 10 deals in the same period last year, according to data provided by VCC Edge, a research platform that tracks investments.
Among this year’s deals, the largest was Morgan Stanley Real Estate Investing’s $90 million funding for a Mumbai project of Sheth Developers Pvt. Ltd.
Recent transactions also reveal a shift in the nature of the deals, with PE funds investing more at the entry or land acquisition stage of projects for superior returns. Funds are choosing between pure equity investments in entry-level project deals, and structured or debt-equity combination deals for investing in advanced projects, say property consultants.
“Investments in real estate have shrunk because it’s mostly domestic funds deploying smaller amount of capital instead of foreign funds. Average deal sizes have also reduced to the range of Rs.75-100 crore compared with Rs.150 crore earlier,” said Amit Goenka, national director, capital transactions, Knight Frank India Pvt. Ltd, a property advisory.
The benefit of entering a project at an early stage is cheaper valuations, which are expected to compensate for the high risks associated with early-stage projects with potential high returns, Goenka added.
PE firm Paracor Capital Advisors Pvt. Ltd is investing Rs.30 crore in a Chennai project of Hallmark Infrastructure Pvt. Ltd at the land acquisition stage, and is set to make a similar-sized investment in Bangalore.
“Risks are there at every stage of a project and the returns are linked to the risks. In this case (the Chennai and Bangalore projects), the risk-return profile is superior and we are comfortable with that risk,” said chief executive and managing director Anil Pathak.
After the economic slowdown of 2008-09, many real estate-focused funds opted to invest in projects at advanced stages of execution largely due to the lower risk quotient involved, and as many developers were mainly looking for project completion finance.
Fund managers say their due diligence processes have become stronger for early stage projects and that they continue to be cautious while investing in these.
“Funds may shy away from taking land zoning or conversion and title risks and in the event where they do take them, they make sure the returns are higher,” said Subhash Bedi, managing director, Red Fort Capital Advisors Pvt. Ltd.
In a recent transaction, Red Fort Capital invested Rs.150 crore in a residential project that is at the design stage, conceived by 3C Company in Gurgaon, a suburb south of New Delhi. Bedi said the fund continues to look at such greenfield opportunities.
Hari Krishna, director, Kotak Realty Fund, said PE firms need a mix of higher returns from early-stage deals and lower risks from advanced projects. “Equity deals in early stage projects ups the returns in its portfolio while structured investments in mature projects bring down the risk element, and both need to strike a balance,” said Krishna.
Kotak has invested in a number of structured deals in recent times, but will also look at equity deals at the land acquisition stage, he said.
Source: Livemint