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Southern and western cities seem to be the favourite of private equity (PE) funds that invest in the real estate space.
Of the $5.16 billion (Rs 27,907 crore) PE funds invested in Indian realty over the past three years, as much as 84 per cent has gone into projects in southern and western cities such as Bangalore, Chennai, Pune and Mumbai, according to data by VCCEdge, the realty research arm of VCCircle.
While the data says New Delhi received PE funds of $722 million in 2012, it was because companies such as Jwala Real Estate, a former unit of DLF, and Indiabulls Infratech, part of Indiabulls Real Estate, were registered in Delhi. The projects of these two operating entities are located in Mumbai. Consider this. The entire $600 million invested by US PE major Blackstone in Indian realty in the last two years, the largest by any investor, went into projects in Bangalore, Pune and other southern and eastern cities.
Blackstone's investments included the information technology special economic zone of DLF-Akruti combine in Pune for $153 million (Rs 810 crore), a $200-million (Rs 1,000 crore) deal with Bangalore-based Embassy group for three of its commercial projects in Pune and Bangalore, $200 million in Manyata IT park in Bangalore and $80 million in EON SEZ in Pune. Reason? According to a former Blackstone executive, big PE funds in general are focusing on urban centres for better visibility of returns.
"Though north is big, it has only a few urban centres such as Delhi and NCR (national capital region). South and west by far have more urban centres, which make them better investment targets," says the executive. PE investors also perceive northern cities as largely residential markets, which are less dependent on external funds and more prone to price fluctuations. The Blackstone executive said, "NCR is mostly residential where you don't get big deals. Big PEs do not want to do Rs 100-150 crore deals now." Adds V Hari Krishna, director, Kotak Realty Fund: "Residential sales in NCR are robust. That is why scope for external source of funds such as private equity is lower."
On the other side, experts say funds such as Blackstone and Maple Tree have been betting on IT parks and SEZs in Indian real estate due to their fixed income and low-risk nature. As southern India is the hub of IT outsourcing, most of them went on investing there.
"If you have to invest in IT properties, you have to go to cities such as Bangalore, Pune or Chennai," says Ambar Maheshwari, managing director (corporate finance), Jones Lang LaSalle. Adds Krishna of Kotak: "If you look at commercial segment, yields in north are much lower than south and west."
Kotak Realty Fund, which manages assets worth $811 million, has deployed 70 per cent of its funds in projects in southern India.
Both PE investors and consultants say there is an issue of perception with companies in the north. "In the north, the amount of speculation is high. Developers depend a lot on channel partners such brokers, underwriters and so on. Hence, the confidence of PEs in such players is limited," says Sanjay Dutt, managing director, Cushman & Wakefield.
"PEs like NCR but would want to tie up with select developers. Comparatively, the rest of the country have more credible players," adds Dutt.
According to the managing director of a Mumbai-based PE fund, since the component of cash is high in the realty projects in NCR, higher returns can't be expected from developers in northern India.
"You take cash from investors in your projects and earn rents through cheques, but you have to give returns to investors in cash component to the extent you have taken cash component," he adds.
Dutt says PEs might spread to other regions in the North and South if developers venture into new areas and the former are comfortable with developers and regions.
"A lot of developers feel that key cities are peaking. They are selectively going to new markets such as Nashik, Nagpur, and Coimbatore. If that happens, and PEs are comfortable with those cities, the scene might change," says Dutt.
According to a senior executive with a Mumbai-based PE, most PEs are focusing on big cities because FDI has slowed down. "If it picks up, tier-II cities may find some takers," he says.
