Equity deals are back in real estate

Equity deals carry 26-27% returns, against pure debt deals, which have 17-18% returns

Equity deals are finding favour with real estate private equity (PE) funds once again. Many real estate PE funds were doing pure debt deals or structured debt deals with property developers as these deals ensure guaranteed returns. PEs are looking at developers who have city-centric projects with high return prospectus.

The new funds to be launched by the likes of HDFC Property Fund and Motilal Oswal Real Estate Fund would do equity investments apart from debt deals, said consultants. Fund managers such as Kotak Realty Fund, Apollo Global Management, SUN AREA and Hines, among others, are also looking to do equity deals apart from doing debt deals.

The reason: In equity deals, they could make an internal rate of return (IRR) of 26-27 per cent, against pure debt deals where they could make 17-18 per cent and mezzanine deals where they could make 22-24 per cent return.

Motilal Oswal Real Estate Fund's forthcoming Rs 750-crore fund is looking to invest 25-30 per cent of the corpus through equity deals, said Sharad Mittal, head and director (real estate fund) at Motilal Oswal Real Estate.

"We plan to have a balance portfolio with a mix of mezzanine and equity transactions and this is in line with our strategy set out earlier. Further, with contraction of yields in the past one year, mix of mezzanine and equity transactions would help us in achieving the desired IRR for the fund," said Mittal.

"Non convertible debentures carry coupon rates of 19-20 per cent but in equity, a fund can make 25-26 per cent returns," said an executive with HDFC group.

Rajeev Bairathi, executive director (capital transactions group), Knight Frank India, says equity deals are making a comeback also because a lot of developers with good track record do not want to take high-cost debt.

"Developers of city-centric projects, which have good return potential don't go for high-cost debt. The only way to participate in them is through equity," said Bairathi.

He added that if funds expect high returns, the only way to generate returns upwards of 20 per cent is either do hybrid debt or go for equity deals.

Added Ambar Maheshwari, chief executive officer (alternative investment funds) at Indiabulls Group, "Given the capitalisation of real estate companies at this point of time, equity has become an important element for funds."