You may be aware that lots of institutions including Mutual funds are raising Private funds for investing in Real Estate Sector. One such avenue was Birla Real Estate Fund which collected close to Rs.680 Crores for investing in 10 projects across india.
Many investors would wonder if investing in real estate, that too through Private equity funds is profitable. For them, the below mentioned article would be an eye opener.
At the end :
Opportunities are like Morning Dews :
To catch one, you have to wake up early, while the world is still sleeping.
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Original Article that appeared in Live Mint Newspaper
Early this month, Singapore’s sovereign wealth fund hired Kishore Gotety, former executive at Deutsche Bank AG’s RREEF Alternative Investments division, to oversee its real estate investments in India.
The hiring by the Government of Singapore Investment Corp. (GIC), as the fund is known, was not an isolated instance. Two other private equity firms have made similar moves in the recent past.
In August, Infrastructure Development Finance Co. Ltd (IDFC) hired Chetan Dave, former chief executive of real estate private equity fund Sun Apollo Real Estate Advisors.
Dave’s mandate is to help IDFC diversify into the private equity real estate business. In March, Baring Private Equity Partners (India) Pvt. Ltd hired Varun Batra, managing director and head of Citigroup Inc.’s India special situations group to do real estate transactions.
Private equity firms that have traditionally avoided investing in real estate have started evincing interest in the space because they are finding it difficult to deploy the huge pile of cash they are sitting on. Real estate investment is attractive because of the potentially high returns it offers.
Typically, investments in the sector are made by focused funds that have a mandate to do only real estate transactions. Such funds have been subscribing to the qualified institutional placements, or QIPs, of real estate developers.
Last year, as the real estate sector began recovering from the slump of 2008-09, many developers turned to QIPs, raising around Rs.13,000 crore.
Baring PE is already getting its strategy in place. “We are looking to invest anywhere between $30-$50 million (Rs.135-225 crore) in commercial and residential projects, and to some extent, hospitality and real-estate related companies,” said Batra.
The PE firm will, however, confine itself to projects in the top eight cities.
“The run-up in real estate prices has got people’s attention,” said Batra. According to him, PE funds with fresh mandates will look to invest in real estate.
Several factors have contributed to the change in strategy of PE funds, say industry experts. PE funds are sitting on a lot of undeployed capital they need to invest. By industry estimates, around $30 billion of dry powder is waiting to be invested in India.
There are many unlisted developers that need funding, but all of them may not be able to tap the public market, giving room for PE investors to step in.
Real deals offer larger scope for deals than other sectors, having emerged as a $30 billion industry, said Amit Goenka, national director, capital transactions, at property consultancy Knight Frank India Pvt. Ltd.
“Returns from real estate can be in excess of 40-50% IRR (internal rate of return),” he said.
According to Goenka, in the next five to seven years, the size of the industry will cross $100 billion and yield high profits.
Equity investors do not seem to be convinced yet about the potential of the sector.
Since the beginning of this year, the Realty Index of the Bombay Stock Exchange, consisting of 13 firms, has fallen by 2.96% while the exchange’s bellwether index, the Sensex, has risen 15.19%. Two prominent firms, DLF Ltd and Unitech Ltd, have risen by 2.24% and 5.59%, respectively.
Real-estate focused PE funds are optimistic about investments, with six being in capital-raising mode, according to Venture Intelligence, a research service focused on PE and mergers and acquisitions.
ICICI Venture Funds Management Co. Ltd is raising a $450 million real estate fund; real estate developer Unitech group is raising a $67 million Mumbai Redevelopment Fund I; and IL&FS Investment Managers Ltd and Milestone Capital Advisors are raising a $400 million IL&FS Milestone Core Fund.
“The industry is in need of capital,” said Shailesh Ghorpade, chief executive of Azure Capital Advisors Pvt. Ltd, which is currently raising a $100 million fund.
“Developers and land owners have become more open to taking PE money and at the same time investors believe that real estate investment provides a risk-adjusted return,” he said.
But, according to Uday Dharmadhikari, chief executive of Usha Breco Realty Ltd, a Mumbai-based real estate developer, PE firms may come on board with a lot of conditions as “investments have taken place but these investors are yet to see profitable returns”.
Going by Venture Intelligence data, 25 PE deals worth $990 million took place this year until August in the real estate space.
The corresponding period of 2009 saw 20 deals worth $602 million, down from 81 deals worth $5.7 billion in 2008.
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