4th of the series
Track2Realty Exclusive
Indian developers will borrow about $1 billion from private equity funds this fiscal year at rates higher than banks, which are cutting loans to builders, Knight Frank assessment suggests.
“The cash-flow situation is fairly precarious with most developers. Private equity is the last resort for funding when developers can’t get money anywhere else,” says Amit Goenka, National Director of capital transactions at the Indian unit of London-based Knight Frank.
Data available with research firms support the trend of rising PE investment in the real estate sector. In the first five months of the current calendar year, there were 20 deals worth $1,322 million (Rs.6,000 crore) in comparison to 22 deals worth $483 million (Rs.2,180 crore) last year, Venture Intelligence, a research service focused on private equity and M&A says.
Some major deals during this period are Jeff Morgan Capital’s investment of $320 million in Compact Disc India’s film city project, Warburg Pincus’ investment of $318 million in Oceanus Real Estate, Ascendas India’s investment of $190 million in Phoenix infocity, among others. During this period, Tata Realty also invested $86 million in Peepul Tree Properties along with around $65 million flowing to Archean Group, Chennai from a PE investor, data from Venture Intelligence shows.
However, this source of funding may also dry up as the PE players have expressed concern about difficulty in exits and governance issues in investee companies. Also, the interest of overseas Limited Partners in Indian real estate has shown decline, of late. The current PE activity in India has largely been by domestic investors or by way of mezzanine capital, organised as FDI.
Private equity funds have bought assets of developers worth about Rs.25 billion this year. Developers will need to repay Rs.260 billion of debt this fiscal year, Goenka estimates.
“Markets are going to be very tough. If developers are declared non-performing assets by banks there will be a huge credit risk. Private equity too might shy away from funding them if they are declared non-performing assets. That could end up being a deal breaker for funding them,” Goenka says.
Clearly, given the constraints, the industry would have to think innovative solutions—some within the box and some outside it. Experience suggests that price corrections have helped recovery from down cycles. This could be looked at even in the present scenario to stimulate sales which have not consummated even though there is pent-up demand of actual end-users.
