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Around $16 billion locked in Mumbai's fund-starved real estate sector

Wednesday, 7 May 2014 - 12:00pm IST | Place: Mumbai | Agency: dna

Close to Rs1,00,000 crore (around $16 billion) by private equity funds is locked in the fund-starved real estate sector as hundreds of projects get delayed across the country and investors struggle for an exit.

Over and above, investments worth around $1 billion are waiting to be deployed in the sector as the fund managers continue to scout for "quality" projects to ensure a steady cash flow for their investors.

The sector now pins its hopes on a stable government in New Delhi that could drive up the market and bring in a new policy framework.

Ever since banks dropped developers from their client list a few years ago and reduced exposure to the "risky" real estate sector at the behest of the RBI, the sector has been at the mercy of private equity (PE) funds. The PE players raised huge funds from the domestic market as well as foreign (offshore) markets promising their investors attractive returns. In return, developers who sourced funds from PE players are doling out a steep 20-30% interest to the funds, making their projects expensive.

Navin Kumar, executive director, fund raising and investor relations, Milestone Capital Advisors, a leading PE player in Mumbai, said there is a fair bit of euphoria now at the developers' end. "They hope that there will be improvement in policy and guidelines that govern the sector. Once a national regulator is in place, companies hope that they would get funds from banks at a cheaper rate. Right now, nine out of 10 developers are in a stress situation," said Kumar.

Milestone is in the process of raising Rs500 crore from the domestic market.

Interestingly, it will add to the over $1billion (around Rs6,000 crore) that is waiting to be deployed in India's real estate. Several PE players that raised funds over last one year are still scouting for projects, according to industry officials.

They point out that 85-90% of projects is delayed way beyond their estimated timeframe, making them a risky investment option.

According to Venture Intelligence, a research firm that tracks PE funds' investments into real estate, the last three years have seen a steady flow of PE funds into the sector. In 2012, a record 27 real estate-focused funds raised a whopping $7.1 billion. In 2011, they raised another $4.2 billion through 16 funds and in 2013, $3 billion through another 16 funds.

The year 2014 has so far witnessed a slowdown in fund raising. PE players raised just about $292 million through two fund raising, but several of them are either in the process of raising fresh funds or close to initiating the process.

Essel Financial Advisors and Managers (EFAM), the private equity arm of Essel Finance, is raising two funds — a domestic fund of Rs500 crore and an offshore fund of $200 million (Rs1,200 crore). Abhinav Bhushan, head of private equity, told dna that they are fortunate to identify assets that have given them good returns. Essel has already made investments of Rs180 crore spread across three deals — two in the National Capital Region (NCR) and one in Mumbai.

Though the overall picture continues to be grim, some PE funds have smartly exited from their investments as well. For instance, Milestone has exited its investment in a commercial property in Pune for about Rs145 crore. The firm held an undisclosed stake in the project which was sold to a high-net-worth individual (HNI).

Similarly, Essel successfully exited from one project in March where it had invested Rs 75 crore in a residential project by Ariisto in a Mumbai suburb of Vile Parle around 18 months ago.

According to Bhushan, the new government should accord real estate sector an industry status. "The government should also streamline the approval process and provide a single-window clearance for projects.

This will help facilitate supply and lead to price correction wherever it is necessary," he said.

Viren Jadhav, managing director of EmerCorp Capital, said that funds worth over $1 billion are waiting to be deployed in India's real estate. "A stable government will mean stability in the sector, and sentiments will improve tremendously. It will also push several projects to move faster towards completion. It can definitely give an exit to several funds stuck with their investments," said Jadhav.

Of late, the rupee volatility and the political uncertainty had made fund raising a tad difficult for PE funds. "Offshore is not a good market now. Many expect the rupee to strengthen once there is a stable government in place. A stable government or a visibility of it will change the sentiments dramatically," said Kumar of Milestone.

Ajay Piramal-owned Indiareit Fund Advisors, a leading player that manages over $1billion in real estate assets, has delayed its $250 million overseas fundraising plan by six months, according to Bloomberg.

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