Tag Archives: Corporate finance

2012 is a Tougher Year for Fund Raising

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Due to global issues, liquidity is becoming a problem. Though the phase is temporarily, the concern cannot be ruled out. Indian real estate sector is banking on the fact that change will take place and market will come out of the situation. The fact of the matter is that next 12 months and in fact 2012, does not look too bright for the sector.

The global debt worries have led to more and more uncertainty. In the last few months, the sector has been plagued by a potential liquidity squeeze. The situation is very unsettling and the fear is that we might end up looking at the year 2008 situation. It is certain that banks will get into selective lending with more strict verifications. In 2012, we are expecting that interest rates might get stabilized but disbursal of home loans will come down.

As RBI has been steadily increasing interest rates, debt for developers is becoming expensive. Also many banks are right now not keen to lend to real estate projects. Due to global uncertainty even private equity is cautious of investing in India. In fact, companies have started looking at alternative routes of fund raising. And many a deals are being done as structured debt deals hiding behind the facade of an equity structure.

In structured debt deals, the companies—investor and investee—sign two agreements. In the publicly announced agreement the investor—a PE or a VC fund—buys an equity stake in the company; and in the second contract they have buyback clause, which allows investee company to buy back its shares from the PE/VC fund at a price that will give the fund a return of about 20% per annum over the duration of the investment.

All signs currently suggest that 2012 would not be an easy year. As debt becomes more expensive and PE funds find it difficult to deploy cash due to global economic conditions, we would see higher number of structured deals taking place in 2012. Though these structured deals are being done, they have their share of problems. The problem is when the side-contracts are not honoured.

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

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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.

Banks prefer Private Developers for lending.

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As per the latest data available from the Reserve Bank of India, the outstanding for commercial real estate is Rs 1187.1 billion as of January 2012, a growth of 12.2 per cent over the year-ago period. Although this rate is lower than the growth figure of 19.9 per cent in the same period the previous year, the double-digit growth stands in sharp contrast to the claims from public-listed realty firms who say bank lending has shrunk considerably.

Central to the theme of continued lending to real estate development are the low-lying, unlisted property developers of the country – a crop of realtors who have always been on the side-lines of the big Indian realty story but who are slowly yet surely climbing up the ladder for a larger share of bank loans.

According to a research report by IDFC’s Institutional Securities team last December, bank and NBFC loans to developers have increased 15 per cent to Rs 1.8 trillion for the 12 months ended September 11 in spite of higher interest rates and the RBI’s efforts to curb lending to the sector. Of this, loans to unlisted developers accounted for more than 72 per cent of the total.

One reason for such a shift could be the hard targets that listed realty firms chase due to the pressure of being listed, with compulsory quarterly disclosures. Add to it the size of the firm and pressure points will become clearer. A listed firm usually places bigger bets with larger projects and when the market faces turbulence, project execution becomes a problem. This reverberates with pending projects and drying up of bank credit.

Even as most unlisted private developers are small realtors, there are some large private groups in different regions of the country. Given the huge set of private developers, even private equity developers have been betting on projects sponsored by such realtors.

Real Estate Firm To Raise Funds

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Feeling Rich
Photo by Trilok RanganA Real Estate firm Embassy Developers is expected to generate over 513 million US Dollars as said by their Prospectus which was filed today. This will be done through an initial public offering of shares.

The draft is available on the Edelweiss website. The lead running managers for the issue are Nomura, UBS, Local Investment Bank and Citi.

The prospectus included that Embassy property is looking at pre-IPO placement of around 57 million shares for up to 11.75 billion rupees with certain investors. The retail investors may be offered a 5% discount on the issue price.

Though the time line is not yet been set.

The Indian companies have raised a lot of money through share sales by mid-June of FY10 from 56 issues which is higher than last year, as shown by the data collected by Thomson Reuters.

India has also asked bids to appoint 4 banks for managing a follow-on public offering in state-run Power grid Corp of India.

IL&FS Plan To Invest In Real Estate

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IL&FS private equity is planning to increase its investment in infrastructure and Real Estate sector by the end of FY10.

They announced to increase their investment from 660 million US dollars to 1 billion US dollars in the infrastructure sector. In the realty sector they already have investments of 1.6 billion US dollars. They are planning to take deals in both the sectors as well.

Mr Shahzad Dalal, Vice Chairman of IL&FS Investment Managers Ltd said, “We will invest close to a billion dollars in infrastructure as well by about the end of this financial year.”

Bangalore Properties - Real Estate India - Vaswani Bella Vista 1
Photo by nancyarora2020In the realty sector the firm has spent 1.2 billion US dollars from the total investment on over 30 deals. It is said that they are now looking at 10 more. The left over amount is expected to be deployed by the end of this year mainly in residential space along with commercial.

The company recently bagged a deal in the real-estate segment through IL&FS Milestone Fund in HCC’s Real-Estate project ‘247 Park’ for Rs 575 cr for a 74 per cent stake.

Mr Dalal further added, “The outlook is fairly bullish on both Real Estate and infrastructure. We believe there are a lot of opportunities. There may not be many good projects, but because of our reach and reputation, we do see some really good projects.”