As NBFCs retreat, private equity funds move in to fund realty projects

Motilal Oswal, HDFC Capital, Xander and other PE funds focused on this segment find opportunity in NBFC retreat

Real estate-focused private equity funds HDFC Capital, Xander Group, Kotak Realty Fund and Motilal Oswal Real Estate are actively scouting for housing deals.

Non-banking finance companies (NBFCs), which had replaced banks in lending to realty developers, have since turned cautious in doing so. This was after their facing a liquidity squeeze in the aftermath of the IL&FS defaults.

“These (HDFC, Motilal, Kotak) PE funds have equity money to invest. The space vacated by NBFCs is being filled by PE funds which have money,” said Rajeev Bairathi, head of capital markets at realty consultants Knight Frank.

For instance, Motilal Oswal Real Estate (MORE) launched a new fund six months earlier. It raised Rs 575 crore in September to invest in affordable housing projects and commercial property. It has invested Rs 50 crore to Rs 150 crore in the top six cities.

“In the present scenario, our deal flow has certainly increased, though based on our investment philosophy. In the past, we have been investing Rs 600-800 crore every year and with adequate dry powder, we shall continue to,” said Sharad Mittal, chief executive at MORE. They announced deals worth Rs 300 crore last month.

HDFC Capital, the real estate fund management arm of HDFC, has around $600 million (Rs 4,200 crore) of investable funds and is looking to invest aggressively, said a source in the know.

“In the current market, we are getting good deals, as many have stopped lending,” said sources. An e-mail to an HDFC spokesperson did not elicit a response.

Kotak Realty Fund is also actively looking at deals in the residential segment, say sources. It is also currently managing the accounts of Abu Dhabi Investment Authority and Qatar Investment Authority in real estate.

“Over the past couple of years, capital providers were taking disproportionate risk and believed somebody else will step in to refinance them. This seems to have stopped, for the time being. Capital providers are becoming more prudent. Hence, there are opportunities, which meet our risk/reward matrix,” said Vikas Chimakurthy, chief executive at Kotak Realty Fund.  The fund manager's focus, he said, remains the top six to seven metropolises across asset classes in real estate and across the entire capital stack from equity to debt.

The share of real estate in Piramal Enterprises’ loan book had come down from 85 per cent in the September quarter of 2016-17 to 74 per cent in the same quarter of 2018-19. The company expects it to be 50 per cent in two years. 

Shobhit Agarwal, managing director at Anarock Capital, said after the NBFC issues in September, they alomost froze further lending to any but basic deals. “In such a scenario, considering the large opportunity set available to them, equity investors have become more active. They are in a situation where they can pick and choose the deals that fit their criteria and are available at good valuation,” he explained.

Flush with funds

• Motilal Oswal Real Estate launched a new fund six months back 

• Motilal Oswal raised Rs 575 crore in September 2018 to invest in affordable housing projects

• HDFC Capital, has around $600 million of investable funds 

• Kotak Realty Fund is managing funds of over $300 million through managing accounts of ADIA, QIA in real estate