PE investment in real estate on rise

Up 3 times in January-May period.

Investment in real estate companies through the private equity (PE) route has shown a nearly threefold rise in the first five months of the current calender year as the fund flow from the banking sector has dried up in the recent past.

Commercial banks are increasingly shying away from taking exposure to real estate companies in the wake of recent 2G-related controversies and worries over business practices. Also, higher provisioning requirement by the apex bank along with fall in demand for residential space are prompting banks to stay away from this sector.

“Most of the developers are going for the PE route in the recent time. This is especially true for big commercial and integrated township projects,” Goutam Chakraborty, regional director of real estate consultancy firm of Colliers International said. He, however, said deal specifics was dependent upon the nature of developers and the amount of funding. PE exposure is not likely to be more than 50 per cent in the recent time, he added.

Data available with research firms support the trend of rising PE investment in the real estate sector. In the first five months of the current calender year, there were 20 deals worth $1,322 million (Rs 6,000 crore) in comparison to 22 deals worth $483 million (Rs 2,180 crore) last year, Venture Intelligence, a research service focused on private equity and M&A said.

According to the research firm, some major deals during this period are Jeff Morgan Capital’s investment of $320 million in Compact Disc India’s film city project, Warburg Pincus’ investment of $318 million in Oceanus Real Estate, Ascendas India’s investment of $190 million in Phoenix infocity, among others.

During this period, Tata Realty also invested $86 million in Peepul Tree Properties along with around $65 million flowing to Archean Group, Chennai from a PE investor, data from Venture Intelligence showed.

Referring to this issue, a top company official from a Bangalore-based real estate company said PE investment was on the rise as banks were slashing their exposure to real estate firms. “Problem is acute in case of small and medium size real estate companies as banks are not ready to take risk with out proven track record,” he said.

He, however, said listed companies with sound presence were able to receive debt from banks. Talking about future trend, he said it would continue for the rest of the year as demand for real estate space was down on the back of higher interest rate regime.