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Realty developers turn to portfolio managers, PEs as bank funds dry up

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are knocking on the doors of portfolio managers, private equity (PE) funds, non-banking finance companies (NBFCs) and other investors as commercial banks, mostly public sector ones, are tightening lending to real estate firms in the aftermath of the bribe-for-loan scam.

“The number of enquiries from developers has increased in the last couple of months and we expect a good deal flow down the line,’’ says Pradeep Khanna, senior fund manager, portfolio management services (PMS) at Asset Management Co. The firm did around half-a-dozen deals with real estate companies last year.

A fund manager with a large PMS firm said the enquiries from developers had increased by 15-20 per cent since October. Portfolio managers such as ICICI Prudential, India Infoline PMS, HDFC PMS and others have invested over Rs 1,200 crore in realty projects since the third quarter of the previous financial year.

PE participation in the real estate sector is also set to increase further. For instance, Mumbai-based DB Realty is in the process of roping in for its forthcoming projects. So is Delhi-based Ansal API, which is in advanced stages of negotiations with a couple of PE funds and investors for its projects in north India.

“We are seeing that a lot of developers who were not even thinking about taking the PE route are now talking to us,’’ says Sunil Rohokale, executive director, ASK Investment Holdings, which recently launched a Rs 1,000-crore realty fund which would raise funds from high net-worth individuals and family trusts.

Already, PE flow in real estate has doubled from $600 million in 2009 to $1,180 million in this year.

Commercial banks, a major source of funds for developers, are taking more time to clear loan proposals of property developers, executives with real estate firms say.

Many attribute this to the central bureau of Investigation (CBI) arresting executives of LIC Housing Finance, Punjab National BanK, Central Bank of India and Bank of India last month for accepting bribes to provide loans to developers.

“PSU banks are becoming indecisive and taking time to clear loans though there is no rhyme or reason for the same,’’ says N Shridhar, director, strategy and finance, DB Group.

In the aftermath of the scam, banks are also asking for additional collateral to process loans. “Now, bank appraisals have become much more stringent,’’ says an executive at Bangalore-based Prestige group.

Besides, some developers are also selling their assets to investors in block with guarantee return schemes, says Goenka of Knight Frank.

In the case of commercial properties, developers promise returns of 12-15 per cent to investors till the construction was complete. For residential properties, they sell them at a certain discount and promise returns to investors till the completion of the project.

Be it PE or PMS, funds do not come cheap. Both the schemes expect returns of around 25 per cent from their investments. Of late, many PE funds are opting for a mix of equity and debt deals to ensure returns at regular intervals, apart from control over the project.

With the cost of funds going up, have also started charging around 16-18 per cent, as against the earlier 15-17 per cent, Goenka says.

Normally, NBFCs charge one to two per cent higher than commercial banks.

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