Private Equity Investors Prefer Debt Deals in Slowdown-hit Realty Market : The Economic Times

Chennai:



Funds happy with fixed 18-20% internal rate of return than higher gains from volatile equity play

Private equity investors are increasingly relying on debt deals with real estate players as home sales slow in the Chennai property market. Chennai-based Landmark Housing Projects last week got on board Mumbai-based Milestone Capital. The  80-crore debt deal is for a fouracre residential project on Chennai's growth corridor Old Mahabalipuram Road at a project cost of 500 crore. The company, in Febru` ary, also roped in Edelweiss's NBFC unit in a  220-crore deal for a 14-acre project off Perambur, a Chennai suburb. “Today, these deals are veering towards structured financing than pure equity. 

The investors are happy with a fixed 1820% internal rate of return than angling for higher returns promised by equity,“ says G Venkatasubramanian, director, Trans Corporate Advisory Services.

Besides the two Landmark Housing deals, Trans Corp also handled the private equity transactions from another developer True Value Homes, which got a 100-crore deal from HDFC Property Fund in May this year. “It brings in discipline and mitigates the risks in execution and selling to a great extent,“ said Sanjeev Rastogi, executive vice-president, ECL Finance.Structured, or debt financing, does not involve stake dilution by the developer. The agree ment entails an interest rate of about 18% to be paid by the developer over principal repayment.There is also an upside sharing clause, which is to help the investor get a share of higher earn ings should the property appreciate in valuations.

Against this, a pure equity transaction means the investor gets a portion of the developer's shares and can exit the deal by selling them off.Despite the dull sentiments, investors are interested in Chennai as end-user buying forms a larger portion compared to investor-led deals as seen in other metropolises such as Mumbai and the National Capital Region. 

Kanchana Krishnan, director, Chennai, for property consultant Knight Frank, said: “The preference for debt is also due to the bitter experiences of private equity companies where the projects were delayed due to regulatory delays, slow sales, and con struction delays severely hampered the IRRs projected.“

According to data collated from various market reports, nearly 25 large private equity deals have happened in the Chennai realty market, accumulating ` . 5,697.50 crore of funding into real estate developers, over the past two years. In 2015 alone, Chennai has seen ` . 2,800 crore of investor funds, with participation from players such as Singapore-based GIC and India-focused foreign fund New Vernon Capital.

The city has drawn a good deal of foreign investments too, largely due to its lower market risk. According to data from Jones Lang LaSalle, foreign investment into the Chennai market came as early as 2005-06 when GIC pumped in ` . 45 crore into XS Real. In 2013, New York's Black Stone invested `. 175 crore in the Ozone Group. Seeing an increasing trend of debt investments, some PEs believe it is time for equity as over-leveraged balance sheets of developers do not warrant more debt.

“Though a majority of the players claiming to be PE are currently doing structured finance only, they should shift gears back to equity as developers are already overleveraged,“ says Amit Bhagat, CEO and managing director of ASK Property Investment Advisors.