Realty firms eye PE as bank funds dry up

Small- and medium-sized realty firms are scouting for private equity funds to finance forthcoming projects as bank funds have dried up following concerns over high credit growth to the sector.

"It is a typical case of demand beating supply, which has lead to high prices. With order-books full for 3 to 5 years, these smaller firms are finding it hard to raise money from the open market. Private equity funds are ready to take this risk," said Alok Agarwal, a senior analyst with brokerage Motilal Oswal.

This year, around 7-8 IPOs, including the much-talked DLF are likely to hit the market.

As per market expectations, most of these issues could see inflows from private equity funds. Conventionally, Indian companies prefer project financing instead of private equity, but the scene has changed over the last few years.

Private equity participation in all sectors grew 252 per cent last year as such funds invested around $7 billion in the country, a report by Asian Venture Capital journal had said recently.

Besides, PE-backed companies have grown faster than their similar-sized competitors, which don't opt for PE funding, a Venture Intelligence report had mentioned.

Despite concerns over growth sustainability of the sector, private equity funds are ready to bear the risk, as they feel that the regulators will not slow down growth in infrastructure to meet the targeted 9 per cent growth.

"It is true that overvaluation exists in the sector. But at the same time, most sectors face similar criticism. I think there could be softening of prices in days to come. But, we don't see chances of a price crash," Amit Dand, manager with Tano Capital said.

Jai Mavani, executive director, KPMG India, observes that overvaluation exists in "select pockets". "A lot of funds and developers are shifting their focus to tier-II and III cities. It is logical for them to do so as population shift is happening in these cities owing to changing job patterns."

Besides private equity funding, construction firms are also exploring raising money at avenues such as London Stock Exchange's Alternate Investment Markets, where they could earn project-specific finance and avoid listing the whole entity.

Using this mode, around 15 Indian firms, including Noida Toll, Ansal, Hiranandani Developers, Unitech and Raheja Group, have raised funds from the AIM this year.

Analysts also predict that the listed real estate as well as construction firms could also sell some equity to private lenders to fund their ongoing projects.

"Real estate firms, with huge land bank, have already scaled high valuations. Housing demand has gone up, but the high lending costs could hurt retail demand. As banks are cautious on over-lending to the sector, I hear some sound of caution for this sector," a real estate analyst said.