250 Crore for Real Estate Private Equity Fund from LIC Housing Finance

LIC Housing Finance Ltd, the mortgage unit of India’s biggest insurer, has achieved a first close of Rs 250 crore for its maiden real estate private equity fund. Launched late last year, the fund has a target size of Rs 500 crore, with a green shoe option of Rs 250 crore. This provision will allow LIC Housing Finance Asset Management Company, the manager of the fund, to sell more units than planned.

“We have raised Rs 250 crore so far from institutional investors like banks and corporates,” AK Sharma, chief executive of LIC Housing Finance, told ET. We also have additional commitment of Rs 50 crore and are hopeful to finish fund raising by June end.” The fund has a target net internal rate of return of over 22%. It will invest in urban real estate such as mid-income housing projects, IT parks and warehouses across tier I and II cities. “There is a huge demand for mid income category homes in the range of Rs 1,600-4,000 per sq ft and we will target such opportunities,” Sharma said.

The fund is already looking at various proposals. The asset management arm of LIC has received a commitment of Rs 50 crore each from LIC and LIC Housing Finance. LIC, which earlier targeted retail investors, is now looking to raise the remaining capital from the institutional investors. “Retail investment in private equity is yet to pick up. Retail investors do not understand the risks and rewards associated with the business,” Sharma said. There are at least half a dozen real estate-focussed funds in the market that are trying to scoop up fresh or follow-up funds to invest in Indian real estate. These include HDFC Property Fund, JP Morgan Asset Management, IndiaReit Fund Advisors and Kotak Realty Fund.

Realty PE Deal Volume in Q1 rises but Big Deals are missing.

Private equity deals are alive and kicking in Indian real estate space even though headline numbers do not reflect the same due to the absence of big ticket investments. The total number of PE deals during the first quarter of CY 2012 has hit a three-year high, according to VCCEdge, the financial research platform of VCCircle.

There were 12 deals worth $279 million in Q1, compared to 9 deals worth $432 million in Q1 CY2011 and 4 deals worth $97 million in the same period in 2010, according to VCCEdge. This is much lower than the peak of 22 deals cumulating to $1.2 billion in the first quarter of 2008, after which stock markets went into a tailspin due to global financial meltdown.

Although the overall value of PE investments has shrunk and investors remain cautious about the sector, it does not necessarily reflect a poor investment scenario in the realty space, according to analysts.

Shobhit Agarwal, joint managing director (capital markets) at property consultant Jones Lang LaSalle India, says, “Most of the funding that is happening now is for last-mile project completion where most of the money has already been spent by the developers and they don’t need large-size funding.” In fact, the projects are 60-70 per cent complete and developers are looking for some more equity to finish them off, he adds.

Last year, the average deal for PE investments was skewed up in the first quarter due to two $100 million-plus investments, including one by Ascendas. This pushed up the average deal size to around $50 million, as against the average size of $20-25 million in Q1 of the previous two years.

But there is another reason for lower quantum of investments by PE firms in the realty sector. According to V Hari Krishna, director of Kotak Realty Fund, “Most of the funds are reaching their shelf life and new fundraising is not happening in the same pace as it happened in the earlier round. Therefore, a lot of funds have either exhausted their capital or are on the verge of it and investments are slowing down.”

Even though the average ticket size of PE investments has shrunk, real estate remains one of the top sectors drawing PE firms. During Q1, real estate accounted for almost 10 per cent of the total PE deal volume and around 15 per cent of total value of PE investments, as per VCCEdge.