Indian real estate funds are finding it tougher than usual to raise money as investors demand a more rigorous due-diligence process in an uncertain environment. Large pension funds and global investors are now seeking exclusive and direct partnerships with developers instead of parking money with fund managers who are essentially intermediaries.
“There are some uncertainties concerning the real estate sector right now,” said Shobhit Agarwal, managing director, capital markets and international director at property consultant JLL India. “India is on the radar and the government has done a lot of marketing to attract investments, but being good domestic fund managers does not automatically make them right to raise dollar-denominated funds,” he added.
The tough environment is forcing many to defer their plans.
For instance, Indiabulls Group, which was scheduled to launch its first offshore real estate fund this year, has deferred the plan to early next year. “Offshore fund-raising always takes time because it entails a long procedure and the current fund-raising environment is quite tough,” said Ambar Maheshwari, chief executive, private equity, Indiabulls Asset Management, an arm of Indiabulls Housing Finance Ltd.
Indiabulls incorporated an investment manager called Indiabulls Asset Management Mauritius, an entity through which it plans to raise and manage multiple offshore funds, and its first fund will have about $250 million in corpus. IIFL Asset Management Ltd, which is also raising its first offshore fund via Mauritius, has found it hard to woo investors.
“It’s a long-drawn process to convince investors to make individual allocations of $20-40 million. The long-term outlook on India is still good, but first-time fund managers have to obviously establish their credentials first,” said a company executive, who did not wish to be identified. Blind pool structured funds, the route used by most of the current lot of fund managers to raise money, take longer and are tougher to raise as it involves getting small amounts from multiple investors.
In the current environment, investors prefer the managed account route instead, which sees the participation of only one or two large limited partners (LPs). Milestone Capital Advisors Ltd, which started raising a Rs.500 crore (domestic) residential fund last year, has decided to suspend it at Rs.200 crore. It has launched a new commercial yield fund instead, as it has better prospects than its residential counterpart.
“In residential, there are too many funds and in today’s market, it has to make sense to the investor. We are positive about the commercial fund, because of the opportunities and it will help us to exit through a REIT (real estate investment trust),” said Rubi Arya, executive vice-chairman, Milestone Capital.
IDFC Alternatives Ltd, which had planned to start fund-raising earlier this year to raise around $250-300 million from offshore investors, is also taking it slow, said two people familiar with the development. It did, however, manage to recently raise its third real estate fund of Rs.760 crore from domestic investors, with a large chunk of it coming from its existing investors.
In 2013, ASK Property Investment Advisors, the private equity arm of financial services firm ASK Group, started raising a $200 million offshore fund, having established its track record as a domestic fund manager. Eventually, it raised $82 million and then suspended fund-raising. This year, ASK has started raising a Rs.2,000 crore special situations fund from domestic and foreign investors to invest in residential projects, which have seen tepid sales.
“India was a no-no in 2013, but there has been a lot of consolidation in real estate since then and foreign investors today are more confident today. However, the due diligence is far stronger, and those who are going for either offshore or domestic without track record, may not succeed,” said Amit Bhagat, chief executive and managing director, ASK Property Investment Advisors.
Others such as Piramal Fund Management Pvt. Ltd (PFM), which has more than Rs.32,000 crore of assets under management, has moved away from its conventional fund-raising strategy altogether.
“Fund-raising momentum has been slow and medium-sized LPs have not been interested. As an investor, we have moved away from the regular fund-raising model and need a continuous source of capital to invest. The typical six-seven year funds don’t make sense, which is why we want to deploy long-term money,” said Khushru Jijina, managing director of PFM.