Property funds are in no hurry to invest in stressed realty projects

Real estate, especially the housing segment, has many financially stressed projects. However, property-focused private equity (PE) funds are in no hurry to put money there. 

The reason: lack of clear legal rules and pricing issues. 

Last week, property consultancy JLL issued a report that there was an opportunity of $66 billion (Rs 4,700 crore) in stalled residential projects for institutional investors to tap. However, it noted, the year 2019 had seen deals worth no more than $1 billion (Rs 70-odd crore) in this space.

“In my sense, a distressed asset is when an asset of Rs 100 is available for Rs 40. Prices have not come to that level. We have not seen banks, NBFCs (non-bank finance companies) and housing finance firms even selling assets at Rs 60,” says Sunil Rohokale, chief executive at ASK Investment Managers.

A project has to be bankable for PE funds to invest, he added. “We are focusing on projects which are bankable, which generate returns for us and where buyers get delivery of the projects,” he said.

Recently, the central government announced an alternative investment fund of Rs 25,000 crore for stalled housing projects. Sharad Mittal, chief executive at Motilal Oswal Real Estate, said funds were watching how the scenario would play out. “There is lack of clarity on regulations. In last-mile funding, the investor wants preference. But, in NCLT (insolvency tribunal) cases, investors lose that preference,” he said.  Hedge funds and special opportunity funds do show interest, said Mittal, while sovereign funds are in “wait and watch” mode.

The managing director (MD) of a Mumbai-based NBFC said there was need for more clarity on the rights of lenders, both secured and unsecured. “After the Essar (Steel insolvency) case (where the Supreme Court recently set aside an order of the appellate insolvency tribunal), a lot more clarity has emerged,” he felt.

Blackstone, Brookfield and other PE funds have put billions of dollars in Indian real estate, mostly the commercial segment. The country’s realty market attracted $3.8 billion (Rs 270 crore) in PE investment this calendar year (till end-September), a nearly 19 per cent yearly rise, according to Anarock Property Consultants.

A sources in HDFC Capital Advisors, which has invested a major portion of its $1.2-billion affordable housing fund, said they'd stick to mid-income projects. “If our investors want to go for stressed projects, we will do it but we're currently doing only mid-income ones,” the source said.

Khushru Jijina, the MD at Piramal Capital and Housing Finance, says they are pursuing such opportunities selectively. “Many projects by small, non-institutional, developers are plagued with issues related to approvals, litigation, developer mismanagement and a general lack of liquidity. Over the past year, we have taken pro-active steps to identify and separate those distressed projects where last-mile capital, coupled with development/investment management expertise, can help,” he said.  

With consolidation playing out in the sector, we increasingly see joint developments between larger, branded, developers and smaller projects which otherwise would have stalled, Jijina added.