Private equity (PE) investors, who had virtually shut the door for real estate players

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two years ago, are slowly walking back into the sector, amid prospects of lucrative returns and a minor drop in risk perception, especially in residential projects. As usual, PE investors are overtly cautious and investments in the sector are happening at a rather slow pace. A slew of PE deals that were concluded in last couple of months have turned out to be a big confidence booster for the sector.

Apart from PE funds, some real estate-dedicated funds are also active in the market, scouting for deals. In the last six months, projects with reputed developers and with lesser risk have been able to attract investments from these investors, say industry experts. While the first round of real estate-dedicated funds matures, a small breed of PE funds is also attempting to go back to their investors for fresh subscription.

Pirojsha Godrej, managing director of Godrej Properties, which recently sewed up a PE deal, is elated. “This fits in well with GPL’s strategy for efficient capital management,” says Godrej, adding that it is no longer difficult for the developers with good track record to attract investors. His company sold 49 per cent equity stake in its subsidiary, Godrej Premium Builders Private Limited (GPBPL) to SUN-Apollo India Real Estate Fund. SUN-Apollo invested Rs 45 crore, out of which Rs18.3 crore has been paid to GPL for sale of stake while Rs 26.7 crore has been invested in GPBPL.

Mumbai-based Omkar Realtors & Developers is another player that has successfully signed a PE deal recently. According to Gaurav Gupta, director of Omkar Realtors & Developers, “Developers with a credible track record and sizeable land parcels are being targeted by investors.” Omkar is getting good response from the investors, he adds.

For instance, IndiaReit Funds Advisors has invested, through a structured deal, Rs 200 crore in Omkar Realtors & Developers mixed-use project at Worli in Mumbai. The deal ensures that the fund gets 100 per cent return in the next four years on completion of the project. “Investors’ confidence is high as Omkar has already delivered nine projects. Both these projects are to be launched in 2012,” claims Gupta.

According to the deal structure, the PE fund will also get 10 per cent incremental return and will control 30 per cent of the special purpose vehicle executing project until these returns are delivered. The developer had also raised Rs 250 crore through another PE transaction with Red Fort Capital, for its Malad project.

Anuj Nangpal, director (investment advisory) of DTZ India, points out tha private equity funds were not able to get the kind of returns from their earlier transactions. “Now they are cautious and investing in projects that carry lesser risk. The returns the private equity firms are expecting is also higher -- around 25 per cent and in some cases even higher than that. Moreover, they are not willing to invest in purchasing of land or in pre-approved projects like they did earlier. The investment is happening in the under-construction projects with lesser risk,” says Nangpal.

For some developers, the situation is more desperate as they are trying to bring down debt through sale of properties to investors. Recently, DLF along with its joint venture partner Hubtown sold 100 per cent of their respective shareholding in DLF Ackruti Info Parks (Pune) for around Rs 810 crore to an entity controlled by real estate fund affiliated with the Blackstone Group, BRE/Mauritius Investments II. DLF plans to use the entire cash flow to retire debt. “The entire value received from the sale will go for debt reduction. Till 2013, we are planning to cut debt worth Rs 6,000 crore. We are looking at monetising our non-core assets for the same. Aman Resorts is on the block for the next quarter,” says Rajeev Talwar, executive director of DLF.

According to Nangpal more such PE transactions are likely to take place as many cash-strapped developers are desperate to restructure debt. “Developers get more flexible payment options and longer tenure with private equity players. For this they are willing to pay high interest rates and borrow from PE investors,” says Nangpal.

Shobhit Agarwal, joint managing director (capital markets) of Jones Lang LaSalle, is however bullish about PE investments. “As of now, PE investment remains flat compared to last year but going forward, it is expected to gain momentum. To tap this opportunity, different asset managers are seeking to raise money through new real estate PE funds that will be floated.”

According to Agarwal, around 12 different asset managers are seeking to raise money via new real estate PE funds to be floated. These funds are expected to invest around $2-2.5 billion in real estate projects in India, says Agarwal.

Another private equity fund, Red Fort Capital, is also in the process of raising around Rs 1,500 crore real estate-dedicated fund in 2012. According to a senior official from Red Fort Capital, they are in the final stages of closing the deal.

However, unlike before, many funds are raising money for investment in structured instruments that resemble debt rather than equity: Desperate developers offer as much as 36 per cent per annum yield on investments.

Kotak Realty Fund recently raised a yield fund of Rs 523 crore entirely from domestic investors. “Given the demand potential, residential projects would be the primary focus of investment followed by commercial properties,” states a Kotak Realty Fund release.

“In a challenging fund-raising environment, we are gratified to see the confidence that both existing and new investors have placed in our funds. This is based on our strong track record,” says Vikas Chimakurthy, director of Kotak Realty Fund.

In another instance, Peninsula Land and Brookfield AMC have announced a joint venture to launch a real estate fund shortly, which will raise money from domestic investors.

On the flip side, several private equity funds are also expected to exit in 2012. “Most private equity real estate fund managers have either hit the exit phase already or are readying themselves to exit investments to repay investors in their funds. In 2012, such funds are expected to sell assets worth around $2.5 billion,” says Anuj Puri, country head of Jones Lang LaSalle.

The real estate consultancy forecasts that realised returns for these funds will continue to be low given the negative market sentiment and weak economy. As a result, fresh investments by real estate PEs are expected to be under $1 billion in 2012, according to Puri.

“In 2010 and 2011, a total $3 billion of real estate private equity exits took place with an average return of only 1.2 times, much lower than expectations,” says Puri. “In the past two years, funds were under pressure to liquidate as their investment period was coming to an end. Also, the negative sentiment and uncertain economy and price correction of real estate projects have yielded low return,” says Puri.

Since many residential projects are nearing completion and will be on offer for sale, real estate funds will have a natural exit in 2012 as well. “The returns in these exits may be marginally better than those realised in the past two years,” adds Puri.