Completion funding catches PE's fancy

Completion financing, or last-mile funding, where developers get funds to complete projects stuck midway, is catching on among private equity (PE) funds.

Realty developers are facing problem on several fronts. While banks are still shying away from lending to developers, raising money through initial public offerings (IPOs) remains a distant dream for them. In this situation, PE funds are eyeing completion financing deals as these deals carry lower risk and attractive valuations.

A host of property funds managed by PE players such as Red Fort Capital, Saffron Asset Advisors, ASK Investment Holdings, Kotak Realty Funds Group are in talks with developers in metros such as Mumbai, Delhi, Chennai and Bangalore to for such deals.

Of these, Red Fort Capital, which invested Rs 90 crore in Parsvnath Developers to complete its premium housing project — Parsvnath La Tropicana — in Delhi in June, and a couple of undisclosed deals, is looking at 10 completion financing deals in Delhi, Mumbai and Chennai, according to its co-founder Subhash Bedi.

ASK Investment Holdings, which is on the verge of closing its Rs 500-crore real estate fund, is in talks with developers in Mumbai, Bangalore, Pune and Delhi to fund residential projects needing completion funding. The fund is expected to make its first investment in December.

Saffron Asset Advisors is also evaluating four such deals.

Despite improvement in home sales, especially in the affordable housing segment, funds say there are also opportunities in the premium housing segment.

Says Bedi of Red Fort, “Money is still not there in the market. Most of the global funds have left and banks are not lending to developers. There are so many premium housing projects which were started two years ago. They need funds to get completed.’’

The Indian property market witnessed a rapid growth between 2004 and 2007, when home prices more than doubled in Mumbai and Delhi, and office rentals shot up due to huge demand for homes and offices in the backdrop of economic boom and huge flow of foreign funds in the sector, especially after foreign direct investment was allowed in real estate after 2005.

But the economic slowdown, which intensified after the collapse of Lehman Brothers in September last year, took the sheen away from the realty sector. Sales came to a standstill and prices fell by 30-40 per cent due to poor demand. Many developers deferred their premium housing projects, and focused only on mid-income housing in the price range of Rs 20 lakh to Rs 60 lakh to generate cash flows.

Says Anuj Puri, chairman of international property consultant Jones Lang LaSalle Meghraj, “Earlier, PEs were mostly doing greenfield funding to help developers buy land and construct buildings, but there were no completion financing opportunities. But they would always want to play in this space as they can clearly see their money is going to complete the project and sale or lease will start only after that. The main advantage is that risks are lower and there is a clear visibility of returns,’’ Puri says.

Ambar Maheshwari, director of Investments at DTZ, a global property consultant, says, “On Tuesday plain vanilla deals are not happening. They are more in the nature of mezzanine financing, receivable discounting types. Funds are looking to invest in projects where significant construction is already over.”

Already, a host of funds such as Abu Dhabi Investment House (ADIH), Global Realty and Yes Bank have announced plans to launch distressed asset funds to invest in several areas, including real estate. Mumbai-based Halcyon and Edelweiss already have such funds. The combined fund-raising efforts of these five firms could mean a war chest of Rs 5,000 crore.

Funds say completion financing deals take a lot of work from funds compared to normal financing deals, though return expectations are similar. Normally, funds expect returns of 20-30 per cent in realty projects.

“These kind of deals are not marketed actively, but are done subtly. Hence, these opportunities depend on relations and how prudently and intelligently you pursue them,” says Ajoy Veer Kapoor, managing director of Saffron Asset Advisors.

Red Fort’s Bedi says funding depends on the amount of construction done, pricing, promoters, time of funding and so on.