Realty funds face uphill task in raising, deploying capital for projects
BENGALURU: Real estate funds that invest in residential projects are finding it longer and tougher to raise money as investors remain sceptical about India’s housing sector.
Deploying money is equally challenging, said fund managers, as home sales remain tepid, return expectations of investors are high and uncertainty looms over the sector.
Five years into the slowdown, non-banking financial companies (NBFCs) are aggressively lending to residential projects leading to downward pressure on lending rates, making it challenging for home-grown private equity funds.
IPAL Fund Managers, which has a strategic partnership with Centrum Wealth Management, has put its plan to launch a Mumbai- focused real estate fund on hold.
In early 2016, IPAL raised its first fund, IPAL Residential Opportunities Fund-1, a Rs250 crore corpus with a co-invest option, which has been fully deployed. “In 2018, we want to focus on making exits from our earlier investments and will complete one exit. Fund-raising is challenging and it has to be a different concept or a unique theme without which it’s tough to raise money for residential projects today,” said IPAL’s managing director and CEO Ramesh Jogani.
First Eagle Capital Advisors Pvt. Ltd, which started raising its first residential-focused fund of Rs500 crore a while back, aims to do a first close sometime soon.
A first close is raising the first tran che of capital from investors, after which the fund starts deploying it Sudarshan Bajoria MD, First Eagle said fund-raising has been tough given that many investors, particularly high-networth individuals, have burnt their fingers in real estate in the past.
“We are reaching our first close soon but in normal circumstances, it wouldn’ t have taken so much time. But investor confidence has been somewhat eroded due to their past investment experience though a recent up tick in sales is a positive,” said Bajoria.
Amit Bhagat, CEO and MD, ASK Property Investment Advisors, said that large investors are still looking at mainly income-yielding assets.
“Investors want to commit money to fund managers who have displayed track record of deploying and returning money and have a differentiated strategy. First-time fund managers will fund it tougher to raise money in this challenging environment,” Bhagat said.
ASK is currently raising a Rs1,000 crore special situations fund that will provide flexible capital, in the form of preferred equity, to developers.
More than a year after a large foreign investor committed to invest $250 million in Arthveda Fund Management Pvt. Ltd’s affordable housing Fund, the commitment has lapsed with the latter not drawing down the money.
Bikram Sen, chief executive officer of Arthveda Fund Management said the firm is now focused on exiting and returning capital (from its previous investments) fast.
“Deployment remains a challenge though there is tremendous demand for capital. There are opportunities to deploy in distressed projects but developers need to be realistic. Funds need to take more control of the way inventory should be priced among other things,” he said.
The key is to launch funds which are different from the others and convince investors.
Brick Eagle Capital Advisory Llp, a financial services platform that funds and advises low-cost housing developers, is raising a Rs500 crore fund for budget housing projects with Rs 10-30 lakh homes.
K ir ti Tim man agoud ar, a partner at Brick Eagle said ideally, the differentiated theme should work for the fund but one needs to tell investors that “we are different”. “The end-product is lowcost homes and the only way we can return money is by the sale of homes ” she said
NBFCS ARE AGGRESSIVELY LENDING TO RESIDENTIAL PROJECTS LEADING TO DOWNWARD PRESSURE ON LENDING RATES, MAKING IT CHALLENGING FOR DOMESTIC PRIVATE EQUITY FUNDS