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Business News/ Companies / Firms look to tap offshore investors for realty funds
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Firms look to tap offshore investors for realty funds

The development comes despite their sobering experience with such funds in the recent past

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

Bengaluru: A clutch of private equity firms plan to raise $3 billion from overseas investors this fiscal year to create dedicated funds that invest in local real estate projects, despite their sobering experience with such funds in the recent past.

Housing Development Finance Corp. Ltd (HDFC) is planning two new offshore funds, a $500 million fund through HDFC Property Fund and an $850 million fund through another entity, said fund executives, who didn’t wish to be named.

Four more—Indiabulls Asset Management Co. Ltd, IDFC Alternatives Ltd, IIFL Group, and Piramal Fund Management Pvt. Ltd—are in various stages of preparation and discussions to launch similar funds to raise $250-350 million each, according to people aware of the developments who did not wish to be named.

Financial services firm IIFL Group, which is in the last leg of raising its 1,000 crore domestic fund IIFL Real Estate Fund (Domestic) Series II, plans to launch a new offshore fund that will invest in residential projects and will primarily do debt transactions, said an IIFL fund executive who declined to be named.

Private equity funds that invest in real estate projects may opt for equity investments which carry higher risks and returns, debt investments with lower but guaranteed returns, or structured transactions which are a mix of both.

“Investors’ appetite for equity is very less, and they are very cautious. This time around will be particularly tough for first-time fund-raisers," said the executive quoted above.

Real estate developers shut out of bank lending amid weak sales and poor cash flows typically secure a large chunk of their funding requirements from external pools such as real estate funds.

However, for the real estate funds, raising money is easier said than done. Out of the target of $500 million for its last fund, HDFC Property Fund could raise only about $370 million, that too after trying for nearly two years. Its new $500 million fund, to be launched sometime later this year, will make both debt deals and equity investments.

“We hope the new fund will not be as long-drawn as last time. We want to show some exits from our earlier investments to investors, and expect some of the existing investors to come back as well as newer investors," said one of the HDFC fund executives quoted earlier.

HDFC is also raising an $850-million fund, which will invest in affordable and mid-income projects.

Apollo Global Management Llc will shortly start raising around $700 million from global investors to make fresh investments in India and China.

“India is looking better than many other emerging markets and the fund (Apollo) wants to play to this. The deployment strategy is opportunistic, and we will look at residential, office, retail and hospitality," said a person familiar with the development, who didn’t want to be named.

Many real estate funds that raised offshore capital in 2006-07 have struggled to return money to investors. Domestic funds such as ASK Property Investment Advisors Pvt. Ltd and Piramal Fund Management Pvt. Ltd, which are in the process of raising foreign capital, have also faced challenges.

ASK Property, for example, has raised $50 million of its $200 million fund, and hopes to achieve a final closure by early next year. “Investor interest is back for India but they have not started issuing commitments. We are trying to tap family offices, individual investors," said Amit Bhagat, chief executive and managing director of ASK Property Investment.

“Fund-raising is tough because limited partners are not enthused about investing in India. Regulatory laws are changing with exit considerations becoming onerous and uncertain. Corporate governance is generally lacking and they don’t find trustworthy partners, based on past experiences," said Prakash Kalothia, managing director at private equity fund SUN-AREA Property Partners. SUN-AREA is also in the process of raising an offshore fund.

Some global funds look to invest directly in projects, while some others form exclusive partnership platforms with Indian developers and investors.

Canada Pension Plan Investment Board has partnered Piramal Enterprises Ltd for a $500 million debt fund and struck an alliance with developer Shapoorji Pallonji Group, with an initial commitment of $200 million.

An affiliate company of the Government of Singapore Investment Corp. Pte Ltd (GIC) and Bengaluru-based realty firm Brigade Enterprises Ltd will invest 1500 crore in residential projects in south India. Separately, GIC and Ascendas Property Fund Trustee Pte. Ltd will invest around $600 million in commercial office projects in India.

“We continue to actively look for new investment opportunities apart from having been very active these last few months," said a spokesperson for investment firm Xander Group Inc. Xander has already invested in several Indian real estate projects.

“It takes a long time to effectively and successfully deploy capital into India given the multiple complexities. Therefore the challenge as always is execution. Announcements do not translate into actual investments." said the spokesperson.

In May, investment bank Goldman Sachs and Bengaluru-based realty firm Nitesh Estates Ltd said they will invest $250 million in income-generating commercial assets.

“This kind of a partnership platform allows you to scale up. For a first-generation company like ours, it helps us grow with global capital," said Nitesh Shetty, chairman and managing director of Nitesh Estates.

A Goldman Sachs spokesperson declined comment.

Investor interest may be returning because of the way the government has projected India as an investment destination, but funds will continue to battle a tough fund-raising scene, said analysts.

“Domestic funds may have a great track record, but they also need a good LP (limited partner) network. Funds that have large institutional support will find it relatively easier," said Rajeev Bairathi, executive director, capital transactions group, at property advisory Knight Frank India.

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Published: 30 Jun 2015, 12:23 AM IST
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