Builders turn to private equity funds to raise money even at high interest rates

Overburdened by huge debt and under pressure to repay bank loans, builders are now turning to private equity (PE) funds to raise money even at interest rates as high as 22-24 per cent.

With sales at an all-time low in the last two years, many domestic and overseas PE funds are looking at the real estate sector, which is starved of funds, as an attractive investment opportunity.

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"Banks are not keen on lending money to the realty sector. Even when they are lending, the cost of interest is very high, in some cases even 24 per cent. Certainly, it has a bearing on the project cost," a Noidabased developer told Mail Today who did not want to be named.

According to industry tracker VCCircle.com, PE investment in Indian realty in the first nine months of 2011 has been estimated at $784 million. Last year, it was estimated at $817 million.

Domestic property-fund houses, including Kotak Realty and IndiaReit Fund Advisors, a fund backed by UK-based PE firm 3i Group, are already in the process of raising about $1 billion, as they bet on the long-term case for property in Asia's thirdlargest economy.

"The financing constraints facing the real estate sector will help provide the PE funds with attractive investment opportunities and we expect deal flow activity to remain robust," Vikas Chimakurthy, director, Kotak Realty Fund said.

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A unit of Kotak Mahindra Bank, Kotak Realty Fund raised Rs 523 crore from domestic investors on Tuesday for a fund that will mainly invest in highyield debt instruments of real estate developers.

"The primary focus of the fund will be on residential projects," the company said. Real estate developers are already under pressure due to plummeting sales.

Property transaction in metro cities has already declined by 50-60 per cent over the last six months on account of inflated property prices and high interest rates.

"We do not see any improvement in sales in the coming months. So, certainly raising money will remain one of the biggest challenges for the real estate sector, going ahead," a senior executive at Red Fort Capital, a leading real estate-focused PE firm, told Mail Today.

"Fund woes will not be over so soon for the sector. We do not expect cash flows to be normal even if interest rates soften. So, realtors have to either go for asset sales or look at PE," he added.

According to industry insiders, even PE funds are not cheap. They come at a rate of 20-25 per cent. In some cases, it is compensated through taking stake in the project. "Raising money from PE funds is not such a comfortable option. The rates are high and unlike banks, they interfere a lot in the pricing of the project.

But there is no dedicated funding option for this sector," the Noida developer added. However, fund managers feel that projects must be priced reasonably to be viable. "No one is going to invest money in a project which is risky. We are not going to put our money in a project which is priced mindlessly. The money will be recovered only if they manage to sell their project and complete it on time," another executive from Indiareit Fund Advisors told Mail Today.

Courtesy: Mail Today