HDFC, SBI launch realty venture capital fund

The Housing Development Finance Corporation Ltd (HDFC) jointly with State Bank of India (SBI) launched a venture capital fund, which will take equity stake in real estate projects in the country.

HDFC Property Fund will start with a targeted fund size of Rs 1,000 crore capital, which will be privately placed with banks, insurance companies, corporates and high networth individuals (HNIs). With foreign direct investment now allowed in the real estate industry, the fund could at a later date attract foreign investment.

At this point of time, however, the fund is meant for domestic investors. This private equity arm investing in the Indian real estate market follows the Securities and Exchange Board of India (Sebi) having removed real estate from the negative list for investments by venture capital funds.

ICICI Ventures, the venture capital arm of the group, has also set up a Rs 5,000-crore property fund for investment in Indian real estate.

HDFC Ventures Trustee Company Ltd and an asset management company, HDFC Venture Capital Ltd, have been incorporated for the fund, with HDFC holding a 80 per cent stake and SBI, the balance 20 per cent.

This fund would invest in equity and equity linked instruments of companies engaged primarily in real estate in major cities in India, stated the company's press release. HDFC could at a later date look at diluting its holding in the VC company.

HDFC has targeted a corpus of Rs 750 crores with a greenshoe option to retain an additional Rs 250 crores. The housing finance major has started marketing the fund and has received positive response from various banks.

The minimum investment has been pegged at Rs 5 crore in this 7-year closed-ended fund, which has no put or call option for early exit.

"Real estate projects usually take about three to four years to complete," said Deepak Parekh, chairman HDFC, adding that a 7-year closed fund would enable re-investment of capital invested in the fund.

HDFC hopes to capitalise on its relationship with real estate developers, and has identified about 8 to 10 projects to start with. Today HDFC offers loans to builders, which said Parekh would continue.

The debt funding to developers would be undertaken at arm's length from the AMC, he added. Real estate developers though optimistic, said the advent of the fund would not help increase the number of real estate development undertaken unless supply and infrastructure are improved.

Urban Land Ceiling Act (ULCA) and the Rent Control Act, as well as a host of others control the supply of land available for development.

"We would look at equity participation by the fund positively as it would give us access to large scale projects," said Parag Munot, director, Kalpataru Constructions Overseas Pvt Ltd.

K G Krishnamurthy, senior general manager, would head the fund as CEO and managing director. The fund's first scheme HI-REF, will invest in three broad classes of companies including projects which are complete, those in the development stage and those in the planning stage.

The latter with a lead time to commercial deployment being 3 to 6 years, would offer the highest amount of return but carry greater risk.

Returns from the real estate sector exceed those for most other investment alternatives in the market. Yields on commercial real estate across metros in India are higher than those prevalent in global real estate markets, said HDFC.

"Worldwide real estate represents a substantial share of fund allocations by institutional investors. With the increase in professional players entering the real estate business coupled with the recent boom, there has been a lot of demand from investors for a real estate investment scheme," said Renu Sud Karnad, executive director, HDFC who would be the non-executive chairperson of HDFC Venture Capital Ltd.