Falling equity returns and rising land prices make sector attractive.
Flush with money from a swelling investor kitty, portfolio managers are increasing their exposure to realty projects. The lacklustre growth in equity market share also led to this. While home prices in Mumbai and the national capital region (NCR) have increased 20-30 per cent since March, to new highs, the BSE Sensex, the country’s key equity index, has grown by nearly seven per cent in the same period.
Portfolio managers have done more than half-a-dozen deals worth Rs 1,200 crore in the real estate segment, according to Amit Goenka, national director, capital markets, Knight Frank, a global property consultant. Recently, India Infoline PMS (portfolio management services) and India Infoline Investment Services, along with their clients, invested Rs 175 crore in a Mumbai realty project of the Wadhawan group, by subscribing to the non-convertible debentures (NCDs) issued by the latter. That was the first tranche of investment and investors are set to invest more in the project, says an executive involved in the deal.
India Infoline recently invested around Rs 250 crore via NCDs in a realty project of the Kamdar group in Mumbai, said an executive involved in the deal. However, while India Infoline has opted for NCDs in the recent deals, others such as the PMS arms of HDFC and ICICI Prudential have done structured equity deals in realty projects, wherein the investors normally get the first right on returns from the project.
Just last week, ICICI Prudential PMS invested Rs 75 crore in a commercial project of the Kanakiya group in Mumbai. The portfolio manager earlier invested around Rs 100 crore for a 40 per cent stake in a project of Ansal API in Ghaziabad. ICICI Prudential PMS did these deals from its real estate funds, with a total corpus of Rs 1,200 crore.
“Due to lower opportunities in equity markets and de-focus from products such as mutual funds and Ulips due to regulatory hurdles, portfolio managers are looking at alternative opportunities such as real estate,’’ says Goenka.
Since banks have been barred by the Reserve Bank of India from lending money to buy land, money from PMS firms is going towards this, he adds.
“Different investors have different risk appetite and treating a particular project as an instrument makes sense from the point of investors,’’ says Harshad Apte, vice president, IIFL. Due to focused due diligence, he says, the ‘water-tight’ agreements entered into by the portfolio manager has clients benefiting in a manner otherwise unlikely. “It gives clients the high returns that the real estate sector offers, as well as comfort from co-investing with us,” he adds.
Debt vs equity
Goenka says a lot of developers are now preferring debt deals, as these are cheaper, faster and flexible than private equity. “Cheaper because unlike private equity (PE) deals, where investors are assured 18-30 per cent returns, debt deals are done at 15 to 18 per cent. While PE deals take 3-4 months, debt deals are closed within a month. And, flexible because you can do whatever you want with debt, unlike PE where the end use is defined,’’ he says.
Goenka says since PE firms have hurdle rates of over 18 per cent, they cannot do debt deals. Hurdle rate is the minimum return an investor requires before making an investment in a project or entity.
Even those who are doing equity deals with developers are not taking chances. “We are doing preferred return deals, as we find differences with developers over valuations. We also want to have a comfort on our investments and protect our downside risk,’’ says a senior fund manager with a large PMS firm, who did not want to be quoted.
Investment advisors say non-banking financing companies such as Indiabulls have also become aggressive in lending to developers, at a rate of 15 to 20 per cent. HDFC, the country’s largest private lender, is the main player in the segment.
Apart from private developers raising funds for buying land and financing projects, promoters of listed property companies’ pledging their shares with non-banking financial companies (NBFCs) have also increased sharply, say consultants.
According to the latest shareholding pattern of 45 BSE-listed real estate companies, promoters of property firms have pledged up to 60 per cent of their holding with lenders.
“When promoters need money, they mortgage shares and raise money. Of late, a lot of promoters have done it,’’ says Ambar Maheshwari, director of investments, DTZ, a property consultant.
However, developers should be careful while doing debt deals, given the fact that property markets are volatile and they need to be paid regularly, consultants say.
Says Gautam Hora, senior vice president, capital markets, Jones Lang LaSalle Meghraj: “Developers should be confident about their projects doing well in doing debt deals. If markets go down, it will be difficult for them to service their obligation,’’ he adds.
According to Maheshwari: “They (portfolio managers) do such deals only if they get twice the cover on such investments.”
