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Home builders switch to equity funding in RERA regime

Top residential developers bracing for a new regulatory regime are scouting for long-term equity capital to finance their projects from the stage of buying land although private equity (PE) funds themselves prefer structured debt. 

Mumbai luxury home builders Kanakia Spaces Realty Pvt. Ltd and Wadhwa Group are among companies in talks with firms, including Piramal Finance Ltd, to jointly buy land, two people aware of the development said.

According to property advisers and developers, tough deadlines under the Real Estate (Regulation and Development) Act (RERA) have prompted builders to seek long-term equity partnerships with PE firms to reduce risks, focus on execution and avoid refinancing loans mid-way through the project cycle, rather than settle for structured debt providers seeking short-term profits.

Kanakia Spaces is in talks with several PE firms for joint land deals of Rs1,000-1,500 crore, said a person involved in the development. “Pure equity partnership is something the company has not explored substantially in the past. Now, there is a renewed interest among PE funds as well with improving regulatory reforms,” the person said. Kanakia did not respond to an email query sent on Saturday.

Similarly, Wadhwa Group is seeking equity partners for buying land, a second person aware of the development said. The builder is also in separate talks with Piramal for a possible partnership for its ongoing 14-acre project ‘Atmosphere’ at Mulund in Mumbai, the person said, asking not to be identified.

“Piramal may pick up some stake in the project,” the person said, adding the deal size could be around Rs200 crore. A Wadhwa spokesperson declined to comment.

Pune-based Kolte Patil Ltd, which has partnered with firms like Portman Holdings LLC and JP Morgan Chase & Co. in the past, is looking for more equity partners in its ongoing large projects including the 400-acre ‘Life Republic’ township, group chief executive officer (CEO) Gopal Sarda said.

Located in Pune, Life Republic is currently being developed under a partnership with ICICI Venture Funds Management Company. “We are keen to get some plain vanilla equity money but at the right valuation and right price. We are in talks with a couple of private equity players to raise funds for our next level of growth particularly for our affordable and other projects in Mumbai and Bengaluru,” Sarda said. According to Khushru Jijina, managing director, Piramal Finance, RERA will raise the need for equity capital with longer tenure as developers’ requirement for funds in a regulated world will only increase.

“Land prices have also rationalised to a certain extent; so, there are opportunities available in the market today for investing at the land acquisition stage with a capable development partner and earning superior risk adjusted returns over the development life cycle,” Jijina said.

Piramal Finance recently created a $250-million equity platform with Ivanhoe Cambridge, a real estate subsidiary of Caisse de dépôt et placement du Québec (CDPQ), Canada’s second largest pension fund. Jijina said the company had started analysing opportunities for the new platform but declined to comment on any specific deal including discussions with Wadhwa and Kanakia, saying any proposal prior to board approval and disclosure to the stock exchanges will be speculative. 

Some equity investors said they would remain cautious and provide equity only to top developers in each micro market. “Demand for equity capital is far more than what is available in the market. As implementation of the regulation came closer, builders are realising that land should not be purchased from debt because it is a vicious circle. It leads to a debt trap and erosion of margin in the projects,” said Amit Bhagat, chief executive officer and managing director, ASK Property Investment Advisors Ltd, a Mumbai-based PE firm.

Xander Finance Ltd and Motilal Oswal Real Estate Fund too remain cautious, citing lack of credibility of many builders and project delays. 

“Demand for equity is high because sales are slow and most developers are already highly leveraged. And with RERA coming in, all developers need a correction in their capital structure,” said Amar Merani, chief executive officer, Xander Finance Ltd, a global private equity firm. 

Property advisors also agreed that equity capital has been coming in the form of platform-level deals, where PE funds and builders partner to invest in multiple projects. However, these transactions are restricted to only large and branded developers. 

“In 2012-13-14, no one was willing to touch real estate as equity, but now at least there is around $1 billion as equity on the back of reforms and the fact that there will be consolidation in this industry,” said Diwakar Rana, managing director, capital markets, Cushman and Wakefield, a global property consultant.

Source : Livemint

9th June, 2017

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