The year 2011 saw one of the lowest investments by the private equity (PE) sector in Indian real estate at $0.85 billion (Rs 4,488 crore) and increased fund-raising activity by domestic fund managers such as Indiareit, Kotak and ASK Investment Holdings. Here is a look at the top three trends likely to emerge in the real estate PE space in 2012.
No of exits
Spurt in the number of exits by PE funds from their investments will be one of the biggest trends in 2012, say fund managers and consultants.
According to property consultant Jones Lang LaSalle (JLL), $2.5-3 billion (nearly Rs 15,840 crore) worth of PE funds are set to exit from the Indian real estate sector in 2012. This is equivalent to the amount of PE exits in the last four years.
“We should see more exits between 2012 and 2013, as the life of funds, which came in between 2005-07, is coming to an end,” said Sunil Rohokale, MD and CEO of ASK Investment Holdings, which manages property funds. PE funds have a life span of five-eight years.
According to JLL, 80 per cent PE funds which came to India between 2006 and 2011, worth $11 billion, entered between 2006 and 2008.
A host of funds such as Kotak, IL&FS, Indiareit and HDFC were looking at exits in the coming year, said executives of these funds.
Though a majority, or 67 per cent, of the exits in the last four years happened through promoter buy-backs, according to a JLL study, the property consultant believes PE funds will prefer and negotiate varied forms of exit modes to discover market-driven best prices for their investments. And, this could lead to more third-party exits.
“Besides, many funds may want to buy out existing funds in projects because they must have completed tenures and the projects need time to complete. New funds want to invest in running projects with commercial viability,” Rohokale said.
The year 2011 saw a handful of such deals. Early this year, Kotak exited its investment in city-based Peepul Tree Properties by selling it to Tata Realty for Rs 385 crore. Then, Blackstone invested $200 million in the Embassy group’s special economic zone in Bangalore, which saw the exit of HDFC property fund.
Though the industry has given 20 per cent returns to investors, JLL chairman Anuj Puri believes the returns will come down to high teens, given the slowdown.
Focused, smaller funds
“We are going to see mostly focused funds — rental yield, debt or those invest in high-risk and high-return assets than general purpose funds,” said V Hari Krishna, director, Kotak Realty Fund.
Earlier this month, Kotak Realty fund said it raised Rs 523 crore ($100 million) from domestic investors, to invest in high-yield debt instruments of residential projects, followed by commercial properties.
Ajay Piramal group’s Indiareit plans to launch a Rs 500-crore Mumbai Redevelopment Fund in February. It recently launched a $125-million (Rs 650-crore) rental yield fund to invest in commercial properties.
“Funds want to invest in fixed income generating projects because they have not seen good returns from development projects. By investing in stabilised assets, they can avoid development risks, sanction risks, leasing risks and others,” said a senior executive of a Mumbai-based fund manager.
New rules and regulations
Fund managers say new regulations, such as the proposed rules for alternative investment funds by the market regulator and Volcker’s rule in the US that prohibits proprietary trading by banks, could impact the fund-raising activity of real estate funds in 2012.
“We are mostly seeing fund raising in domestic markets and most investors invest an average of Rs 25 lakh to Rs 50 lakh. If you restrict it to Rs 1 crore, then fund managers are forced to approach only ultra high networth individuals,” said Amit Goenka, national director, capital transactions, Knight Frank.
ASK’s Rohokale said instead of treating banks’ participation in the funds as exposure to capital markets and real estate, it should facilitate their participation in such funds. “In the West, banks, insurance companies and pension funds are the largest investors in PE funds. They should be allowed to invest in India also,” he said.