Piramal Enterprises, which has invested in diverse businesses including Vodafone, is stepping up real estate play.
The company, along with CPPIB Credit Investments, one of the largest pension fund in the world, is launching a $500 million residential development debt financing fund in India.
The wholly owned subsidiary of Canada Pension Plan Investment Board and Piramal Enterprises will contribute $250 million each.
Ajay Piramal, chairman, Piramal Enterprises said this is an opportune time to create an aligned pool of capital. "The money will be targeted at what we believe to be very compelling financing opportunities in the real estate sector," he said.
Indiareit Fund Advisors, the real estate fund management arm of PEL, is the advisor to the fund.
Typically, returns targeted from such investments are upwards of 18-20%.
Commenting on the deal, Nitin Gupta, managing director, Macquarie Capital, said foreign institutional investors such as Canada Pension are keen on investing in India, but selectively.
"Money will come but into selected baskets only and for funds/advisories that have a well-thought of investment structure assuring good and stable returns," he said.
Experts said with bank funding for real estate projects drying up, developers have no option but to look at private investment firms. This has led to realty focused private equity firms and non-banking financial companies (NBFCs) offering equity, debt and mezzanine (combination of debt and equity) across various stages of development of the real estate projects.
So what does it take for a developer to qualify for such funding?
Investment parameters, according to Khushru Jijina, managing director, Indiareit Fund Advisors, include past business track record, relationships with other private equity players, execution capabilities, approach to conducting business, experienced/qualified team of professionals.
However, the funding comes at a premium over the interest rate charged by the bank.
"Interest rate charged by banks is typically around 14% hence interest charged on debt offered by such funds would be 3-5% over that," said an official from a domestic investment advisory.
Construction finance industry experts said the rate can come down to 16-16.5% from 18-20% depending on the market scenario and the milestones achieved by the developer.
"Structured debt funding make sense because no front-end payment (to the new bank) will have to be made as it will be continuation of the same agreement. Also, depending on milestones and cash flows it can easily be converted it to a lower coupon debt. There is a lot of ease in this mode and it ultimately pays back," said Jijina.