Are real-estate funds investing in iffy projects?

MUMBAI: Mukesh Ambani right-hand man Anand Jain’s real estate fund, the Urban Infrastructure Opportunities Fund, which got a capital commitment of Rs 2,221 crore (around $550 million) in August last year, has deployed about 70% funds, and is committed to deploying the remaining by December 2007.

Meanwhile, Pantaloon-promoted Kshitij Investment Advisory, which closed its second real estate fund, the Horizon International Fund, with a corpus of $350 million in June 2006, has said it has committed around 65% of its corpus.

Though deployment is different from commitment, these short periods over which real estate funds are completing their investments look like they are in a hurry to close the fund, deploy and move on to the next fund. It also beats the normal investment customs of such funds, which typically stagger their investments over years.

There are a lot of opportunities in the real estate sector. But, why there is such quick deployment? Some feel that these loosely regulated funds, a number of which are raised in partnership with real estate developers, refinance projects and assets of developers.

“While real estate companies themselves are listed, and many of them have raised money from the public markets for certain projects, they are also getting to another level of financing for the same assets through these real estate funds,” says Vimal Bhandari, country head of Aegon NV.

He explains with an analogy from the telecom sector. Telecom companies are hiving off the tower business by forming a holding company. While the towers are financed by the shareholders of the parent telecom company, they will again be sold to investors who subscribe to the shares of the new tower company.

An industry source who did not wish to be named added, “When such refinancing occurs, developers who have already raised money for themselves (from the public markets) and an iffy project, move their own money into a better project, and move the real estate fund’s investments into iffy projects,” he said.

This means that all your money in real estate funds is not going into the best of projects. “There are restrictions on bank lending to real estate developers and they also find it difficult to generate enough cash flows from ongoing projects. So then they come to real estate funds.

And if a fund is desperate to deploy, then the developer has met his requirements,” said KG Krishnamurthy, chief executive officer of HDFC Venture Capital, which has just raised an $800 million fund. Unlike most others, Krishnamurthy says that he has set a target of 4 years to fully invest his moneys in the 9-year closed-ended fund.

“Opportunities are increasing, but that doesn’t mean that one should not do due diligence in the properties one’s investing in,” he said.

Chetan Dave, managing director of Sun Apollo Venture has a straightforward answer to the fast deployment. “My sense is that people are investing according to their plans, and they have also managed to deploy at a faster rate than they originally planned for,” he said.

“In our case, we are going about it in a measured way, according to plan,” he added, without divulging how much of the $630 million he raised early this year, has been deployed.

According to him, globally, the period of deployment varies anywhere between 3 and 5 years. Pranay Vakil, chairman of Knight Frank, however, has a different take.

“If you see the prospectuses of these funds, they are typically 6-7-year closed-ended funds that have the option to extend the period by a maximum of 2 years. In such a scenario, spreading out their investments over 3-5 years will not work. They typically get fully invested within 18 months to a maximum of 2 years,” he said.

“The project has to be good, the developer has to be credible, and the track record of the developer should justify the size he is developing,” he says, adding that all three together are difficult to come by.

But another fund that’s gone at a very fast pace is Indiareit Fund Advisors, which raised a Rs 430 crore ($106 million) domestic fund in September 2006, and a $200 million offshore fund in December 2006. According to Ramesh T Jogani, managing director and chief executive officer of Indiareit Fund Advisors, 75% of the first fund and 55% of the second fund are deployed.

“As the GDP is showing promise to continue growth at 8%, there are ample opportunities in the Indian real estate sector. As a prudent policy, we only raise further funds when our respective domestic and offshore funds are 75% committed,” he said.

And that’s exactly what Jogani is doing. He is raising a Rs 700 crore ($175 million) domestic fund, Rs 500 crore of which has already been raised. And once the existing offshore fund gets 75% deployed, he will raise another offshore fund, in which he hopes to get commitments of around $750 million.

We’re telling you to put your money into the right kind of fund, and keep a constant check on where your money is getting invested.

—with inputs from Ashish K Tiwari