MFs re-discover love for realty

Newly-deleveraged balance sheets make their shares attractive.

Mutual funds’ exposure to equity of real estate companies has increased significantly in the last two quarters.

The MFs’ investment in real estate stocks rose from Rs 124 crore at the end of March 2009 and Rs 171 crore at the end of December 2008 to nearly Rs 1,113 crore at the end of the first quarter of FY09.

The value of shares held by MFs in major real estate companies stood at Rs 1,421 crore on July 2009 while the total number of shares held by them was 88.3 million, according to data available at ValueResearch.

With real estate companies like DLF and Unitech raising funds through instruments such as qualified institutional placements (QIPs) while focusing on low-cost housing projects in April-May, MFs started investing in the sector in the June quarter.

“Most large real estate companies have deleveraged their balance sheets. Valuations of several such companies are benign. We have exposure to companies in this space that have already raised money and have a strong balance sheet ” said Prateek Agrawal, head, equity, Bharti AXA Investment Managers.

In April this year, Unitech raised Rs 1,620 crore through a QIP issue. The promoters of DLF sold 9.9 per cent to raise Rs 3,860 crore.

“While about four-five months ago, we had zero equity exposure to the real estate sector, over the last two months, it has become 2-3 per cent of our total assets under management (AUM),” said Ajay Argal, equity co- head, Birla Sun life Mutual Fund.

Over medium and long term, there were significant value-creation opportunities in the equity side of the real estate sector, said Piyush Surana, CEO, Shinsei AMC.

Still jittery on debt
However, fund houses are staying away from the debt of real estate companies. “The fact that the mutual fund industry had invested in a lot of debt paper issued by the sector created a perception of uncertainty,” said Surana.

In February-March 2009, Icra downgraded ratings of three debt schemes because of high exposure to the real estate sector.

“Mutual funds’ exposure to debt of real estate companies continues to come down. Investors are showing interest in equity because of attractive valuations. As the capital structure of the real estate companies gets better when their equity rises, we could see mutual funds investing in their debt too,” said Karthik Srinivasan of Icra.

Consequently, the credit ratings of most schemes continues at the same levels. On a consolidated level, the share of the real estate exposure in the total assets under management of ICRA-rated schemes declined to 0.4 per cent as on May 2009, from 2.5 per cent in December 2008 and 1.5 per cent in March 2009.

“The real estate sector has been stressed for cash. Mutual funds are in general cautious over exposure to the real estate sector. Repayment is an issue in debt investment in real estate companies. We do not have any debt exposure to real estate,” said Ashish Nigam, head, fixed income, Religare Mutual Fund.