About fifteen new real estate funds have registered with market regulator SEBI after the new Alternative Investment Fund (AIF) regulations took effect in May 2012. New funds had applied for registration last year and SEBI had been granting approvals since October 2012. Early funds started raising funds in the recent quarter and around ten funds are in various stages of raising capital.
All private equity funds were asked to raise their investment limits in May 2012 by SEBI in order to better regulate the industry. The new rules have increased the minimum investment size for investors to Rs 1 crore.
Real estate-focused private equity funds are struggling for a come-back this year, after difficult fund-raising atmosphere in the last two years. Data from Venture Intelligence, a research service focused on private equity, shows that three real estate funds raised $120 million in the recent April-June quarter, much lower than the $295 million raised during the same period last year.
Raising the bar
There are lingering concerns that the higher limit can throw up challenges in raising capital. “Setting the minimum limit at Rs 25 lakh would have opened up the funds to more investors” opined Chinnu Senthilkumar, co-founder and a shareholder at private-equity firm Azure Capital Advisors.
However, Nitin Goel, Partner, Real Estate Investments at Milestone Capital, believes that funds with a good track record of providing exits and returning money back to the investors should not be adversely impacted.
Also, domestic funds have been able to demonstrate good performance in the last few years, even while foreign funds have lagged. This will also be favourable for these funds to help attract capital.
The higher investment limit, also accentuates the role of overseas investors. Anuj Puri, Chairman and Country Head, Jones Lang LaSalle India, expressed optimism on investments from overseas investors in the next couple of years and estimated that there could be robust inflows of $4-5 billion.
Residential focus
So where are these funds expecting to invest the capital for generating returns? Funds see the residential segment as promising, as there is ‘strong demand’ at reasonable pricing and a large estimated supply shortfall. While the retail and commercial segments are deeply linked to the general economic conditions, the residential market is perceived to be more resilient.
“The residential landscape looks very promising, and is set to witness many large deals in the near future” says Shrinivas Rao, CEO — Asia Pacific, Vestian Global.
There is also a trend towards city-centric properties compared to tier-2 and tier-3 cities. For instance, Jones Lang LaSalle’s Segregated Funds Group raised Rs 101 crore in the last quarter for its fund focussed on residential developments in seven cities. Funds are also showing a preference for debt or debt-like exposures. According to Sanjay Dutt, Executive Managing Director — South Asia, Cushman and Wakefield India, PE firms are opting for preferred deals with builders. The typical expectation is a 25 per cent return with an 18 per cent guarantee. This offers return protection and the funds work towards gaining the extra 7 per cent which is based on the builder’s profits.
Return guarantees are preferred by investors too, according to Saurabh Gupta of IIFL Real Estate Fund, as periodic income distributed helps the investor’s cash flows.
Among the various markets, Bangalore witnessed the highest number and value of private equity investments at Rs 3,250 crore in 2012, double that of 2011.