Originally published in The Economic Times on 23rd August , 2011
BANGALORE/DELHI: Private equity funds in the realty space like SARE, FIRE Capital, Tishman Speyer, IREO, Millennium Spire and others have turned developers and are developing their own realty projects so that it can earn higher returns for its investors.
This gives them access to at least 15-20% higher returns through upfront capital investment to aggregate land, value-add through development activities and ultimate sale to different buyers.
Further it helps PE funds to raise capital from investors with longer investment horizon from institutions such as pension funds, university trusts, and sovereign wealth fund. It also gives private equity funds more control over the project in these tough times.
"When we manage our projects, we are on the drivers' seat. Globally, we buy assets that can be renovated and repositioned and that is also one of the focus in India," said Rakesh Kumar Sharma, managing director of Tishman Speyer in India.
Tishman Speyer already has an operational commercial project in Gatchibowli, Hyderabad - Wave Rock. "We raise money to invest in our projects and can confront, manage and mitigate our risk. Others who invest in projects of other developers are ultimately dependent on the developer for execution," said Sharma.
Mumbai-based Indiareit Fund Advisors plans to tie up with land owner across cities such as Bangalore, Mumbai and Pune to develop properties.
"Most fund houses had learnt their lesson in the last three years. Private equity investors are playing more active role than earlier," said Ramesh Jogani managing director of Indiareit Fund Advisors.
Apart from the funding team Indiareit also has own asset management team which includes architect and civil engineers who looks after project execution. Jogani himself has 22 years of experience in developing properties across the country.
Indiareit's first project will come up in the IT capital of India, Bangalore. The fund house had entered into an agreement with land owner in Bangalore to develop a 17-acre plot in Sarjapur Bangalore to develop villas prices around 6,000 per sq ft.
"Real estate investments enables funds diversify their investment profile and generate stable, predictable cash flows through lease or rental income over the fund life, which can offset volatile returns in other investments," said Amit Goenka, national director, capital transactions at property consultancy Knight Frank India.
According to PwC, $480 million was invested by PE funds into Indian property sector in Q1 2011 as against $122 million during the same period last year. Arvind Pahwa, chief executive officer of South Asian Real Estate (SARE), a UK-based $2.4-billion equity fund, including almost $1 billion in real estate sector says that understanding the development is a tough task for private equity funds.
"In doing our own development, we can add value to our own projects and have better control but it is not easy. It helps when we sell our projects to buyers who feel that there would be no shortage of capital and the project will be delivered on time since it is developed by PE funds," said Pahwa.