BIGGEST FDI IN INDIAN REALTY SINCE 2008 - Piramal Realty to Get Warburg's Rs 1,800cr Injection :The Economic Times

Indian firm to use funds to buy land in Mumbai to build residential towers

Private equity giant Warburg Pincus is no stranger to making big bucks from small investments. A $292-million investment in Sunil Mittal's Bharti Tele-Ventures (now called Bharti Airtel and India's biggest telco) in 1999-2001 helped it earn $1.6 billion in 2005, a jaw-dropping return of 5.5 times. In 2007, it invested . 245 crore for a majority stake ` in Alliance Tire and sold it for . 2,850 crore in 2013.` On Tuesday , Warburg once again did the unexpected by agreeing to invest `. 1,800 crore in a family real estate company owned by Ajay Piramal for a minority stake. The amount may seem small but it is India's biggest foreign direct investment in the real estate sector since 2008 and the second-biggest after Dubai-based realtor Emaar's investment in the nowdisintegrating JV with MGF.

Piramal, once one of India's premier drug barons, is now busy fashioning a financial services-cum-real estate conglomerate that sells cheap finance to truck owners and fleet operators and builds highrise apartments for Mumbai's high and mighty on abandoned mill lands. Piramal Realty will use the money to buy land in various parts of the maximum city and build highrise residential towers. The New York-headquartered Warburg Pincus will get two seats on Piramal Realty's board, which will be reconstituted soon.

“Warburg Pincus invests in companies with high growth potential and believes that Piramal Realty is best positioned to achieve leadership in one of the most attractive real estate markets,“ said Niten Malhan, co-head India, Warburg Pincus.

Global private equity funds have long been envious of India's real estate potential given the demographics, rising aspirations among the middle class and the need for housing. But funds such as Blackstone, Xander and GIC have been cautious and have preferred to invest in projects rather than companies, aware of the risk of promoters going bust by over-extending themselves.Other private equity funds have chosen to buy out completed, income-generating properties from promoters af ter paying a premium.

The deal is an exception to both as all the money is to be invested in the company and not in any specific project. It is also not a buyout but an investment that will have to yield returns.

Realty Sector Facing Distress

“It's an exciting time to build a company,“ Anand Piramal, executive director of the Piramal Group, told ET in an exclusive interaction. “Much of this capital will be used for new land parcels.“ He made it a point to stress the distress affecting various segments of the realty sector and added that this will be an opportunity to buy distressed projects.

Founded in 2011, Mumbai-based Piramal Realty currently has over 10 million sq ft of projects under development in various parts of Mumbai and surrounding localities including Byculla, Worli, Bandra-Kurla Complex, Mulund and Thane. Piramal said the focus will be local as real estate is a local game given each city's complex regulations and unique micro markets.

Distress in the real estate sector, espe cially for companies in Mumbai and Delhi is high. Inventories are soaring and buyers are staying away waiting for prices to come down. Real estate firms are resorting to discounts, free bies and staggered payment schemes.

The debt of India's top 15 listed realty developers climbed to Rs 54,567 crore a the end of March 2015 compared with Rs 50,400 crore at the end of March 2013. Unsold inventory in the top seven property markets has risen to abou 853.09 million sq ft, or about 650,000 apartments, at the end of March 2015 according to property research firm Liases Foras.

Turning to Private Equity Funds

Many developers are also taking the help of private equity funds to grow and stay afloat. Real estate PE investments rose 85% in the January-March period from a year ago with PE firms investing Rs 5,168 crore, up from Rs 2,800 crore a year ago.

The residential sector attracted the highest transaction volumes during the quarter with a 53% share in total investment activity, followed by the com mercial office sector, which had a 47% share.

To succeed, the partners will not only have to build and complete projects on time but also stay above the issues of cartelization and price-fixing that dog so many realty companies. “We are not in the FSI (floor space index) maximisation game. As a senior board member once told us, FSI is the cocaine of the real estate game. But we are not into it,“ Anand Piramal said.

A deal of this nature augurs well for the sector, experts said. “We have not come across such a large deal at company level in the recent past, particularly since 2008 financial crisis,“ said Shashank Jain, partner (transaction services), PwC India. “It could signal investors' reviving interest in the market and Indian property market's growth potential.“

The Warburg-Piramal association dates back to the 1990s when the Indian firm was very much a drug company and real estate was probably a gleam in the eye of its promoter Ajay Piramal. In 1997, Warburg invested $30 million in Piramal Healthcare, exiting only in 2007.