DB Realty deal with Starwood Capital in doldrums

Recent controversies surrounding DB Realty may have forced private equity firm Starwood Capital to junk plans for investing in one of its premier projects.

DB Realty, India’s third-largest realty firm by market capitalisation, was in talks with Starwood Capital  to invest Rs450 crore for a 10-15% stake in the Government Bandra Colony project.

However, a senior executive affiliated to a private equity firm told DNA Starwood Capital is no longer considering the investment.

“There is no substance whatsoever in Starwood Capital participating in this fundraising exercise by DB Realty. It appears to be a desperate effort by the realtors to attract more investor participation to fund this development,” the executive said.

However, a DB Realty spokesperson maintained the deal is in the works. “Starwood Capital is considering investment in the Bandra Government Colony project and we have signed a non-binding term sheet.”

“Due diligence is in progress and we do not have any information of them backing out of the deal,” the spokesperson added.

Meanwhile, lending credence to talk of the deal falling through, DB Realty has restarted negotiations with other private equity firms.

“We were talking to a few PE funds. However, we now have a couple of domestic investors looking at this project and we should quickly be able to finalise the deal and pay the money to the government,” the spokesperson said.

“We are talking to a domestic private equity fund investor to raise Rs600-800 crore. The stake sale of 25-30% was a back-up to the Starwood one and we are looking to probably close the deal soon,” another DB Realty official said on condition of anonymity.

DB Realty was first in talks with HDFC India Real Estate Fund (HIREF) to raise Rs450 crore, but the fund backed out.

“The project at present has 3-3.5 FSI and they have valuated everything based on a FSI of 4 that they think they will get because it is a MMRDA project. But if they don’t get the 4 FSI the project is totally inviable. That’s why we backed out from it,” a senior HIREF official said.

That’s when Starwood Capital entered the picture, albeit offering a lower valuation. The developer had indicated in August 2010 that it would sell 20% stake in the project for Rs1,200 crore, whereas now it is eager to sell off 25-30% stake for half the amount.

The company has to make a payment of Rs803 crore by the end of February to keep the project in its stable.

An analyst affiliated to a domestic brokerage felt the current market situation is not good enough for projects of this size to command premiums.

“The valuations have come down and their plan to sell at Rs20,000 per square feet is now a concern,” the analyst said.

An email sent last week to Starwood Capital’s officials in the US and to Sundaram V Rajagopal, managing director, Starwood Capital India Advisors Pvt Ltd, remained unanswered.

Last week, it was reported in the stock exchanges that Shahzaad Dalal, an independent director on D B Realty board, had resigned. It is learnt that Dalal, vice-president of IL&FS Investment

Managers, had sent his resignation to the company last year in November and the embattled real estate group kept his resignation in abeyance for three months, underscoring a shaky governance record.

Incidentally, Sundaram V Rajagopal also serves as non-executive non-independent director of D B Realty Ltd. Given the controversies surrounding the realtor, there is concern on whether Rajagopal will remain on the company’s board.

“He is close to the DB Realty promoters and is on their board in his personal capacity,” a source said. “His presence on the board cannot be seen as a representation from Starwood Capital. Now whether he will resign from the board or hold on to the position is something he will have to take a call on. Having said that, I’d presume that being the India head of a globally renowned investment firm, he should probably step down from the realty company’s board on ethical grounds.”