Realty players warm up to PE

Faced with a liquidity crunch, real estate developers are bracing up for more private equity investments as a source of long-term capital. What's more, they are today more realistic and flexible about valuations and financing structures than they were even three months ago.

That's because other sources of funds have dried up, be it stock markets, debt, London Stock Exchange's Alternate Investment Market or the possibility of listing real estate investment trusts abroad.

Developers prefer public capital as they do not have to give up management control. Two developers secured $101 million (Rs 400 crore) from two private equity firms last Thursday.

The Delhi-based Parsvnath Developers received $47 million (Rs 186 crore) from twoSaffron Group funds to develop a residential and shopping complex on a now-defunct bus depot at Kurla in central Mumbai.

The Mumbai-based Lodha Group got $54 million from a HDFC-sponsored, Mauritius-based fund. The fund will take a 45 per cent stake in a special purpose vehicle, which will develop projects in Hyderabad, Lodha said in Mumbai on Thursday.

''Real estate developers are more forthcoming, flexible and realistic than they were three to 12 months ago,'' said Chanakya Chakravarti, managing director (real estate business), Actis Advisers, a PE firm.

The expectations are softening, going by how proposals are being structured. A lot of value creation was earlier front-ended, with developers wanting the entire premium at the beginning of the project.

Experts say developers are now accepting structures that recognise that value-creation and premium should be based on performance.

The key reason why private equity deals in the real estate space were fewer in the last six months was the differences on valuations.

"Not every developer understands that there's a correction. They seek capital at valuations which are out of sync with the market," said a CEO of a leading PE fund.

For instance, a builder with a piece of land may think he can build flats and sell them three years down the line at Rs 8,000 per sq ft, and assigns a valuation of say Rs 80 crore (Rs 800 million). A PE investor knows that markets are cyclical, and hence, will arrive at valuations of Rs 50 crore (Rs 500 million), assuming a lower price.

''There are valuation differences. But it's a matter of time before developers realise and get on with life,'' said S Srinivasan, CEO, Kotak Realty Fund.

''The fundamentals are very much in place. India is a long-term growth story. Our funds have a tenure of seven to nine years. We can take a bit of rough with the smooth,'' Srinivasan said, adding, "We have a mandate from our investors to invest.

Capital is available. It's better to partner with long-term capital with reasonable valuations," added Srinivasan.

''... Even if the GDP growth slows down to 6 to 7 per cent, there will be demand for a lot of office space and hotel rooms,'' said Chakravarti.

Developers are realising the benefits of partnering with institutional investors, who can help them tap into networks of technology providers and financiers. "Developers are recognising this, and in the next few months, more realtors will strike partnerships with PE firms to access long-term capital and tap into their networks to reduce costs,'' said an expert.

For instance, Actis Advisers has invested in MFE Formwork (formerly called Mivan), a specialist construction company which provides aluminium formwork for residential buildings where the curing time is short (six days against the conventional 15 days).

''This enables developers to build faster and take advantage of the technology to reduce costs,'' said Chakravarti.

Many developers in southern and western India have been using Mivan's formwork, which enjoys a good presence in West Asia.