Are PE Funds The New Banks For Indian Developers?

When private equity funds first flocked to the Indian real estate market between 2006 and 2008, a majority burnt their fingers on projects that were ill-planned and over-valued, leaving them unable to recover their investments. But today, that nightmare seems to have been left behind, with private equity interest in the sector soaring. “Private equity interest is definitely on the rise and why not? China is drying up and funds have no better option today than India which will lead the wave of the future”, says Niranjan Hiranandani, Founder & MD of the Hiranandani Group.

That sentiment is reflected in the numbers. International property consultant Cushman and Wakefield estimates that total private equity inflows into Indian real estate were at a little over Rs 11,000 crores in the first half of 2015, compared to Rs 4,000 crores in the same period in 2014 with global and domestic fund houses sensing opportunities in the distressed real estate market. Experts say sales have dropped and developers find themselves with no funds to finish ongoing projects or expand their businesses, leaving them with no option but to turn to PE funds that are then able to enter at cheaper valuations while exercising more control. “A lot of private equity funds are going long on real estate. They are betting on the long term potential of real estate and the fact that this market is only going to mature. A lot of investments are going to go towards land buying, towards funding the growth for these developers because there is a lot of residential potential still left as far as real estate is concerned”, says Rubi Arya, Executive Vice-chairman, Milestone Capital Advisors.

The government’s effort to promote India as an investment destination is paying off with foreign funds lining up to invest in the Indian real estate sector, as seen by the number of big ticket deals signed this year including Warburg Pincus’s investments in Piramal Realty, Goldman Sachs investments in Piramal Realty and Nitesh Estates and Blackstone’s acquisition of 24/7 tech park in Mumbai. These investments by global funds are being seen as an endorsement of Indian real estate and are also spurring consolidation in the sector. “More and more developers are seeking private equity opportunities and there is a lot of M&A going on in the market where a certain profile of developers from the tier 1 and tier 2 categories are taking over projects from tier 3 developers or even brownfield projects. This is making the whole field very interesting for investors because there is a quick turnaround”, says Sanjay Dutt, Executive MD – South Asia, Cushman & Wakefield

That is all the more relevant, considering that the real estate sector’s only other hope – REITs is still stuck with the industry many calling for further tax clarity in the regulations proposed by SEBI. Couple this with the reluctance of banks to lend to the real estate sector and the limitation on borrowing to purchase land and it is clear that private equity investments are the only hope for the sector to expand and survive the slump. Going ahead, experts are hopeful that positive sentiments coupled with a softening interest rate cycle will lead to more private equity investments coming in.

Nikhil Narayan Sivadas, Assistant Editor, NDTV

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