Realty funds get traction with a regulator in the offing

Raise $420 million so far this year against $520 mn last year

Realty funds have raised $420 million in the first three months of 2016 (calendar year) against $520 million last year, according to VC Circle. With the real estate regulator set to be a reality soon, these funds expect further acceleration in fund-raising and investing opportunity in residential real estate.

So far, private equity investment in the sector has been largely restricted to commercial real estate that offered annuity income for minimum risk assets.

This space has so far been dominated by global investors such as Blackstone. This trend is set to change with many home-grown players getting aggressive to invest in residential real estate, for which they are raising funds from foreign and local limited partners or investors.

“The capital that players like Kotak have raised is to benefit from the potential distress in the residential real estate market, which we believe may accentuate going forward. Our target is to acquire stakes in the right projects at attractive valuations,” said Vikas Chimakurthy, chief investment officer at Kotak Realty Fund, which raised $250 million (Rs 1,600 crore) last week.

According to Chimakurthy, it is not easy to raise such a fund with a very limited number of global sovereign and pension funds being interested in it. But, with the Real Estate Regulation and Development (RERA) Bill set to be passed, the interest of limited partners is expected to change.

Under the RERA Bill, 70 per cent of sales proceeds have to be used towards construction cost. Hence, only 30 per cent is available to service equity or debt taken for land acquisition till the project is completed. Therefore, servicing of debt used for land acquisition is going to be slightly tough unless it is flexible debt. “In the current slow pace environment, they would need to have a capital structure skewed towards debt with flexible repayment options or equity,” says Chimakurthy.

ASK India Real Estate Special Opportunities Fund raised $146 million this year for the $200-million fund it launched in October 2014, indicating a reviving interest of limited partners for such opportunities. The fund aims to invest in mid-sized self-liquidating residential projects in six major cities — Mumbai, Pune, Chennai, Bengaluru, Delhi national capital region and Hyderabad.

“In the past six months, some large institutional and sovereign funds have announced a few equity deals. In view of the proposed regulation, the need for equity will increase because of escrow requirements,” says Amit Bhagat, managing director and chief ASK Property Investment Advisors. “Earlier, developers used to borrow for buying land but might not have the same flexibility now,” he said, pointing out the emerging opportunity.

Real estate fund manager Milestone Capital recently raised Rs 150 crore for its Rs 500-crore fund from high net worth individuals and insurance companies. The fund was launched in January last year. Milestone plans to raise the remaining amount in the next six months.

“Sentiments in real estate fund-raising are improving and with the recent reforms, we expect even better traction in the coming months. With the demand for quality housing clearly outstripping supply, residential real estate is largely responsible for the increase in funding to the sector,” says Rubi Arya, vice-chairman, Milestone Capital.

These funds are expecting about 25 per cent internal rate of return for their investments in the sector.