Pvt equity funds take SPV route in realty

Private equity funds are turning cautious on direct investments in the real estate sector.

"The funds are finding it safer to invest in a special purpose vehicle (SPV) created for implementing 5-6 projects," said Rashesh Shah, CEO & managing director of Edelweiss Capital, which manages real estate investments of about Rs 250 crore. Edelweiss has invested a part of the kitty in SPV for projects in western India.

Analysts said the SPV route made sense, considering that the earnings flow in such projects was clearer and there was no hype concerning land banks.

ICICI Ventures, HDFC, IL&FS Investment Managers, Kotak and foreign players such as Morgan Stanley, Citibank and others have made private equity investments in the sector.

The tightening of liquidity and curbs on lendings have hit bank credit flow to the sector following concerns over a price bubble in the sector.

Share prices of real estate companies had zoomed last year based on their land holdings. Shares of Unitech, India's largest real-estate developer by market value, soared by 26,869 per cent in the last three years.

However, the curbs on the sector and the rising rates have resulted in a sharp fall in their share prices in recent months. Unitech, Prasvnath Developers, Sobha Developers, Akruti Nirman and Ansal Properties & Infrastructure have lost 40-50 per cent in recent times.

Pranay Vakil, chairman, Knight Frank India, a leading international property consultant, admitted that private equity funds have become "cautious" about putting money in real estate companies.

He said in the UK, there was a set of rules and norms for land valuations, known as the Red Book. Further, the Royal Institution for Chartered Surveyors provides independent advice on land, property, construction and environmental issues.

All Indian developers such as Unitech, Hiranandani's Hirco, Western Pioneer Properties, the Raheja group's Ishaan Real Estate and Dev Developers have tapped the Alternative Investment Market (AIM) in London.

It is learnt that some of them had to bring down their land valuations, based on the Red Book norms. A lack of such norms in India was detrimental to PEs, Vakil said.

On the strategy adopted by Indian companies for AIM listing, Richard Smee of Ernst & Young, said, "They have taken five, six or seven of their major projects and provided investors with a new company in London with an opportunity to invest in those projects."