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Despite few deals, realty PEs on fundraising mode

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The in India, which is in a slump, is witnessing a flood of new or follow-on private equity (PE) funds in the market. Though funds launched last year found it tough to raise money, 2012 has seen more firms jumping on the fundraising bandwagon.

This is despite the fact that PE/(VC) deals in realty have come down drastically in 2012 so far. According to data from VCCedge, 17 deals worth $360 million took place till date in 2012 against 38 deals worth $1.3 billion last year.

But raising funds will be tough in this market. Hari Krishna, director, Kotak Realty Fund, said, “The old funds are trying to raise their second fund and, in my opinion, most will fail to raise second funds as investor appetite is very limited and, in any case, the track record of most funds has not been inspiring.”

REAL ESTATE FUNDS IN 2011
Figures in $million Amount Fund size
Red Fort India RE Fund II 264.5 500
ASK RE Special Opportunities Fund 114.3 220
Red Fort India RE Fund II 105.0 500
Milestone Domestic Scheme III 100.0 109
Kotak India Realty Fund IV 98.0 112
IIFL RE Fund (Domestic) Series I 98.0 98
Urban Development Fund 47.0 110
India Advantage Fund RE Series II 44.0 220
ASK RE Special Opportunities Fund 36.5 220
ArthVeda STAR Fund 16.0 40
Source: VCCEdge

IL&FS Investment Managers, Anand Rathi-Knight Frank, JP Morgan Partners, ASK Investment Advisors, Azure Capital Advisors, Lavi Real Estate Advisors are a few firms in fundraising mode. Also, Sanjay Dutt, former India CEO of Jones Lang LaSalle also plans to launch a new realty fund.

Amit Goenka, National Director - Capital Transactions, Knight Frank India, said, "The risk weightage of real estate has sharply gone up due to unending project delays, credit defaults, shallow market conditions, difficult exits and low returns to investors."

Krishna said, "Returns have been a function of year of investment. For instance, most funds have earned returns in excess of 25 per cent from their investments in 2005, 2006 and 2009. On the other hand, investments from the year 2007 and 2008 will significantly underperform and in some cases, investors will loose a part of their capital also.”

Bridging the funding gap

The poor market conditions and non-availability of bank loans has squeezed real estate developers and private equity has emerged as an alternate source of funding.

"The real estate industry is cash starved due to slow sales velocity, cautious lending by banks besides growing land payments and interest obligations. Hence most players are turning to PE players for raising risk capital," Goenka said.

The BSE Realty Index has fallen by 14 per cent since the Union Budget for FY13 was announced while the BSE- Sensex fell by 7 per cent.

According to NSE data, realty firms raised Rs 14,574 crore through 10 Initial Public Offering (IPO) and Follow-on Public Offer (FPO) in 2007. In 2011, companies raised only Rs 60 crore and it slightly improved to Rs 127 crore so far in 2012.

Ramesh Nair, Managing Director - West India, Jones Lang LaSalle said, "The key criteria that most PE funds are looking at are macroeconomic fundamentals and ease of investing and exiting. India has substantially improved on these parameters substantially over the last 5 years."

As per industry estimates, the sector is in need of almost $ 15 billion of private capital over the next twelve months to sustain its growth momentum. The current bank exposure to commercial real estate is already $25 billion and not going up any more, say experts. 

According to them, there will be a demand of 200 million square feet for office, 1.5 billion sft for residential and 60 million sft for retail in next 5 years.

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