3i-backed Indiareit plans funds to tap rental yield, debt market

3i Group Plc-backed Indiareit Fund Advisors Pvt plans to start a commercial rental yield fund and a domestic debt fund in the next few months as borrowing costs rise for developers and the office market picks up.

The company will also spend Rs 246 crore ($55 million) in three residential developments in North Mumbai’s Versova area and in Bangalore, while pulling out of an Rs 82.5 crore project in central Mumbai, Chief Executive Officer Ramesh Jogani said.

Indiareit is raising money as India’s central bank raised rates nine times in 15 months to cool inflation. Private equity firms made 10 real estate investments valued at $883 million in the three months to March, according to Venture Intelligence, compared with $1.24 billion in 34 deals in India last year.

“The time is right for a debt fund now as the yields will be very attractive,” Jogani said.

Price increases in markets such as Mumbai and the central bank’s rate policy have hurt sentiment and led to a short-term liquidity squeeze for builders, S Sriniwasan chief executive officer at Kotak Investment Advisors Ltd, said last week.

The increase in borrowing costs has crimped demand for homes while making it more expensive for builders to access funds. A seven-month lull in real estate initial share sales also made it difficult for developers to access the stock market. Oberoi Realty Ltd and Prestige Estates Projects Ltd, which both sold shares in October, are trading at discounts to their offer prices.

FUNDRAISING
Indiareit said in December it plans to raise about $622 million in three new funds that will invest in properties across the nation’s major cities.

Billionaire Ajay Piramal, who had planned to sell his controlling stake in Indiareit to avoid a conflict of interest with his own real estate development plans, reversed that decision last month when Piramal Healthcare Ltd agreed to acquire Indiareit for Rs 225 crore as the drugmaker seeks to expand into financial services.

Indiareit also sold stakes in other property investments. The fund completed its exit from Neptune Realtors Pvt’s commercial project in Mumbai, a Rs 145 crore investment made in 2007 which yielded a three-fold return, Jogani said. The investment generated an internal rate of return of 30 per cent.

Another Indiareit fund also sold part of its investments in SSPDL Ltd’s Retreat project and from Samira Habitats, which is developing homes in the coastal town of Alibaug near Mumbai, and returned 58 per cent of the money collected from investors. Another fund also sold part of its holdings in Ariisto Developers’s residential project in Mumbai and returned 15 per cent of the fund to investors.

Indiareit, started in 2006, advises on funds worth about $850 million that invest in real estate in the Indian cities of Mumbai, Chennai, Bangalore, Hyderabad and Pune. 3i, Europe’s largest publicly traded private-equity firm, is a cornerstone investor in Indiareit’s $200 million offshore fund.