Realty funds turn to home market

Foreign investors chary for diverse reasons, beside having more restrictions.

With global investors keeping away from Indian realty, private equity (PE) fund managers are trying to persuade high net worth individuals (HNIs) and executives of domestic financial institutions to fill the gap.

Hari Krishna, director, Kotak Realty Fund, said, “Foreign LPs’ (limited partners) interest has decreased relatively, following reduction in their AUM (assets under management) due to losses in developed economies. Lack of returns from India from past investments so far is another reason. Also, inflation and corruption scandals are hurting their belief in the India growth story.”

Domestic fund raising from HNIs is much easier and faster, he added. Kotak’s new real estate fund’s target corpus is Rs 500 crore and the focus is on providing debt/quasi-debt to real estate projects in four-five large cities to benefit from the funds shortage in the sector.

Shobhit Agarwal, managing director, Protiviti Consulting Pvt Ltd, said, “This is the second wave of fund raising for real estate-focused funds in India. As exits from the first round have not reflected blockbuster returns, the time for raising funds would be extended and getting commitments more challenging.” He said better opportunities are available in other regions as compared to India, where foreign investors also worry about business practices, project delays and regulatory issues.

ICICI Venture, raising a Rs 1,000-crore India Advantage Fund Real Estate Series-2, is expecting to close the process in the next nine months. Sanjeev Dasgupta, president, real estate, said, “International investors are less excited about Indian real estate space.”

Indiareit Fund Advisors, part of the Ajay Piramal Group, is also on a fundraising mode. After raising Rs 925 crore from domestic investors last year, it plans to launch a rental yield fund next month. “Domestic funds can invest in smaller projects, unlike foreign funds which have restrictions such as minimum area, minimum investment and lock-in. Domestic funds have more flexibility than offshore funds,” says Ramesh Jogani, managing director and CEO.

Indiareit has launched three domestic funds since 2006 — Indiareit Domestic Fund Scheme I (Rs 430 crore), Scheme III (Rs 538 crore) and Scheme IV (Rs 500 crore). And, a single offshore fund in 2006, with a corpus of $200 million.

Another major doing so is ASK Property Investment Advisors. It raised Rs 520 crore last month as part of a Rs 1,000-crore domestic fund. It plans to raise a remaining Rs 480 crore this year.

“Raising money from domestic funds is becoming difficult unless you have a fantastic team and a platform that can demonstrate ability to return the money to investors. Raising money from international markets is tougher than domestic markets, as a lot of investors have lost their money in the past,” says Ambar Maheshwari, managing director-corporate finance, Jones Lang LaSalle India, a property consultant.

With banks and institutional lenders being extremely cautious in lending to the real estate sector, there is a higher demand for capital from PE. “As domestic fund raising is a smaller part, foreign money would be crucial. This would be a stimulus in the short term, but how overseas investors react, only time will tell,” Agarwal added.