At present the entire corporate sector in India is facing a liquidity crunch. With economic growth slowing down,banks are reluctant to lend for fear of rising NPAs (non-performing assets). And given the troubles in the major global economies,it has become difficult to raise funds through the ECB (external commercial borrowing) route. The stock markets are also in doldrums,so raising capital through IPOs (initial public offer) and FPOs (follow-on public offer) is also ruled out. The real estate sector,in particular,finds itself in dire straits because builders rely heavily on loans from banks and advances from property buyers to fund their developments. With most of the other avenues closing down,developers are now setting their sights on private equity (PE) funds to help them complete their ongoing projects and to start new ones. However,raising money from private equity funds is no cakewalk today,unlike the case two-three years earlier when private equity funds vied with each other to fund developers projects. Says Anshul Jain,CEO-India of DTZ International Property Advisers: Today many deals are available at bargain prices in developed markets like the US and the UK,so private equity investors prefer these markets to investing in India. He adds that with capital becoming scarce,private equity investors are also demanding a higher return on investments (RoIs). In other words,it has become more expensive for developers to use their funds. However,PE investments in the Indian real estate sector are expected to continue as,says Jain,valuations have become more realistic today compared to last year. However there is still a lot of uncertainty about future projects and PE investors would have to exercise a lot of caution when investing in such deals,investing only in companies whose outlook remains positive, he explains. In a similar vein,Anuj Puri,chairman and country head of Jones Lang LaSalle Megraj says,It is not easy to get hold of PE funds,and their returns expectations are also high. He adds that these funds at times expect returns as high as 30 per cent. According to estimates,internationally,real estate private equity funds have raised as much as Rs 63,388 crore ($130 billion) over the last two years. A large percentage of these funds raised are focused on markets outside the US,especially emerging markets such as India and China. For now,several domestic and international PE firms have lined up to buy stake in real estate projects and SEZs,including Goldman Sachs,Deutsche Bank,Blackstone,Lehman Brothers,Kshitij Real Estate Funds (a Pantaloon Group company),HDFC Realty,and so on. When the outlook was positive Last year,when the outlook for the Indian real estate sector was much brighter,a number of private equity funds,both foreign and domestic,had invested in the real estate sector in India. A German real estate fund MPC Synergy put in about Rs 1,300 crore in Mumbai-based realtor Phoenix Mills. Likewise,BTS India Private Equity Fund invested in Saisudhir Infrastructures Ltd. Axis Bank invested in Lavasa Corporation,a subsidiary of Hindustan Construction Company (HCC),in the form of convertible preference shares and convertible debentures. Citi Property Investors infused Rs 800 crore in four SEZ projects of real estate firm BPTP Group. And now According to a source,DLFs subsidiary DAL (DLF Assets) is in discussions with global investment company TPG (Texas Pacific Group) and Mumbai-based investment firm JM Financial to raise over Rs 2,500 crore. Unitech Ltd,the second largest realty firm in the country,is looking to raise about Rs 28,000 crore ($560 million) from PE funds,for which company is in continuous talks with several agencies. The company already has a debt of over Rs 8,000 crore,which it has to repay by March 31,2009. The company is facing tough times as it has lost over 93 per cent of its market value in the last 12 months. According to Fitch Ratings,the management of Unitech is in talks with several banks and is expected to raise Rs 900 crore from them. According to an insider,the company is in talks with PE funds to raise Rs 15,000 crore at the corporate level and as much as Rs 7,400 crore for specific projects. STRIDING WITH CAUTION According to market experts,as the demand for real estate is sluggish,and the projections by builders on selling price and swiftness of sales are also on the negative side,PE funds too are treading with caution. Jain of DTZ assumes that the situation would get even more demanding in the next few months on account of the downturn in the market. But this also offers a great opportunity for PE investors to look at the real estate industry again, he says. Also PE should not always be considered as a substitute for debt,as it comes at a much higher cost than debt. However,as debt has become difficult to arrange today due to the reduced lending from the financial institutions,developers are looking for other alternatives. Moreover,as the real estate sector has a long gestation period and does not show results in less than two to four years,PE funds too need to come in with a long-term investment horizon. This should be a good time for PE firms to start evaluating deals, says Jain. praveen.singh@expressindia.com
