Realty developer-backed PE funds fail to take off

Unitech group, Ackruti’s plans still on paper while Shapoorji’s fund gets few takers.

The slowdown in the real estate sector may have seen developers going easy with projects, but even the launch of private equity funds backed by developers have failed to take off.

The fluctuating economic environment has repelled, at least, three real estate developers, who had planned to mop up nearly Rs 3,000 crore from domestic institutional and retail investors last year, from not testing the waters. Those who had planned to float funds included CIG Realty funds, a part of Unitech promoter group, Ackruti City and Shapoorji Pallonji.

The fund would have allowed the companies to directly approach the source and raise the money instead of going to a third-party fund manager. This would also help them save on margins and fees given to the managers.

But poor investor sentiments in the property market, coupled with a perception that developer-backed PE funds might lead to conflict of interest, have posed challenges for developers planning such funds from going ahead.

For instance, the Rs 300 crore Mumbai Redevelopment Fund I, launched by CIG Realty Funds (an asset management company floated by Unitech promoters) last April, is yet to close. According to sources in the PE sector, the fund manager is not seeking funds for this particular scheme any more.

Touted as the first city-focused scheme in India, CIG's fund promised a fixed coupon rate of eight per cent and overall rates of 20 per cent to investors. The fund had a initial target of Rs 200 crore and an over-allotment option of Rs 100 crore.

A mail sent to CIG Realty funds did not elicit any response.

Similarly, the Rs 250-crore fund planned by Mumbai-based property developer Ackruti City in partnership with Pacifica and Beekman Helix is yet to take off even after a year.

"Real estate market is very cyclical. It is not the right time to launch such funds," said a senior executive from Ackruti City.

According to sources, Shapoorji Pallonji, which launched its $500-million realty fund in April, has got commitments worth $120 million and may go for the first close at $300 million. Shapoorji spokesperson did not respond to queries.

But a Shapoorji executive, however, claimed their fund was different and would look at investing in projects of other developers.

“History of realty funds has been chequered. Many funds have not done well. So, the investor market is not looking at new funds,” said a fund manager requesting anonymity.

Ambar Maheshwari, managing director, corporate finance with international property consultant Jones Lang LaSalle said investors see conflict of interest in the funds floated by property developers.

“Investors are wary of developer-backed funds using the discretionary third party fund in their own projects. Besides, such projects may compete with the projects in which their fund are invested,” he said.