High Inventory, Slow Sales Make PE Funds Rush For Bulk Deals – The Economic Times – 16-Dec-2014
December 25, 2014 - Uncategorized
A record unsold inventory of more than 800,000 apartments and slow home sales are turning out to be an opportunity for private equity funds in the country and they are lapping up apartments in bulk from developers who are willing to give significant discounts.
A clutch of private-equity funds, including Piramal Fund Management, Aditya Birla Real Estate Fund and a combine of former Indiareit head Ramesh Jogani and Centrum Wealth Management, have launched apartment funds in the past few months.
Indiareit Apartment Fund, managed by Piramal Fund Management, has already concluded two such deals — one each in a Mumbai suburbs and Chennai’s Adyar area — and is currently in talks for a third in Mumbai. Across these three transactions, the fund will deploy Rs 125 crore from the Rs 500 crore it raised since July.
Aditya Birla Real Estate Fund, which is part of the Aditya Birla Financial Services Group, has invested Rs 150 crore to pick residential apartments from two developers in Mumbai between June and September. This includes Rs 90 crore for 30 apartments in a project in Dadar and .`60 crore for a similar number of flats at a project in Oshiwara. Apurva Muthalia, chief executive of Aditya Birla Real Estate Fund, didn’t respond to an email seeking comment.
“There is enough stress in the system today. Apartments are available for a significant discount,” said Jogani, CEO of IPAL Residential Opportunity Fund, which is in the process of raising Rs 250 crore with a focus on buying apartments in bulk in Mumbai. It has an option of raising another Rs 100 crore if investor demand exceeds the initial size planned for the fund.
According to property brokers, builders are offering discounts anywhere between 25% and 35% for new projects compared with ready projects in the same neighbourhood.
Khushru Jijina, managing director of Piramal Fund Management, said an apartment fund enables the developer to block a substantial number of units for an institutional buyer. “The developer can use the proceeds to advance construction and delivery of the project and increase visibility of site progress.”
For the investor, the fund allows him to access value deals in the market and participate in a “secured” position with the benefit of a highly attractive price, diligence and structuring compared to an individual transaction and that too in projects that have established sales velocity and construction timelines, says Jijina.
Buoyed by the response, Indiareit Apartment Fund has exercised its green-shoe option to increase the size of the offering and is now even aiming to mop up Rs 700 crore.
“The biggest challenge will be to exit without accepting any cash. The funds insist on all-white deals, their returns might get compromised,” said Anckur Srivasttava, chairman of GenReal Property Advisers.
Jogani of IPAL Residential Opportunity Fund says with the mood changing, he is hoping the gap between the price of early-stage under-construction projects and completed projects to get covered faster.
The fund, which is in talks with a few builders in Mumbai for such deals in the Rs 1-3 crore price range for affordable luxury projects, will have an agreement with the builder to sell the apartments for them along with his inventory. Aditya Birla Real Estate Fund too is in talks for more such investments with bulk discount with developers, said a person with knowledge of the developer but not wanting to be named. “These are equity deals with part payment made upfront and remaining on these underconstruction projects receiving occupancy certificates,” he says.