PE & NBFC investors opt for hard assets like apartments

At a time when developers are facing a cash crunch and exits have become difficult, investors including private equity and non-banking financial companies are opting for hard assets such as apartments besides a fixed interest rate for their investments. When US-Based JP Morgan invested in Kanakia Paris, a luxury residential project in Mumbai’s Bandra Kurla Complex area, the deal was structured in such a way that the investor also got a certain number of apartments in lieu of investments, besides a fixed rate of return.

 According to sources, JP Morgan has done four-to-five such deals in the recent past. It works like this: Developers take a low-cost loan from the fund at 12-14 per cent rate. The fund also takes a certain number of apartments as equity kicker. This is a hybrid structure. “It works well for the developer as he need not borrow at 20 per cent. Some part of the inventory also goes out; if the fund is not able to sell, it is a it’s headache,” said the chief executive of a private equity fund.

“For the fund, it makes sense when they are not sure whether the developer would repay the entire coupon.” He said besides JP Morgan, Aditya Birla Real Estate fund, ICICI Prudential, and Edelweiss do such deals. When contacted, a JP Morgan spokesperson declined to comment on the subject. Mails sent to Aditya Birla and Edelweiss did not elicit any response. ICICI Prudential could not be contacted for comments.

Amit Oberoi, national director – knowledge systems, at Colliers International, said the mechanism gives the developer the liquidity to complete the project or to use the funds to complete another project or for acquisition of land for future development. “The investor gets a decent return and in some cases a brokerage fee as well, while having rights to the asset in case of a default.” According to Oberoi, the key for the investor is to choose a project that is marketable and to invest at an optimum price that will ensure sales and a decent return.

“A healthy appreciation in prices is an additional upside for the investor. An investor with a good broker network has an advantage in this deal structure.”

The CEO quoted above said the difference between the above-mentioned deals and bulk-buying deals were very thin.

Recently, fund house IPAL, backed by Centrum, bought 12,000 sq ft of space for Rs 26 crore in Ariisto Realtors’ under-construction project, Ariisto Sommet in suburban Mumbai’s Goregaon. IPAL has effectively bought space worth Rs 52 crore, but paid only Rs 26 crore to the developer. The remaining amount would be payable after the company manages to sell these apartments. In the second transaction, IPAL bought about 8,000 sq ft for Rs 27 crore in Radius Developers’ project Avenue 54, a six-acre gated community in suburban Santacruz (west).  Besides IPAL, Piramal Fund Management, Edelweiss and Indiabulls do bulk buying deals where they buy apartments at a discount to the market price, said Ajay Jain, executive director at Centrum Investment Banking.

Piramal has an apartment fund of Rs 500 crore and 75 per cent is committed, said its managing director Khushru Jijina. “The Fund’s inventory of apartments are also sold by the developer in an agreed ratio through the developers’ existing channel so as not to create any competitive pricing pressure that typically happens with retail underwriters on a secondary basis.” Jain of Centrum said: “In order to complete such projects, and free up cashflow and moving to other projects, they are doing bulk sale at a 25-40 per cent discount to market prices.”

HOW IT WORKS

  • Developers take a low cost loan from the fund at 12-14% rate. The fund also takes a certain number of apartments as equity kicker
  • It works well for the developer as he need not borrow at 20%. Some part of the inventory also goes out; if the fund is not able to sell, it is a headache
  • For the fund, it makes sense when they are not sure whether the developer would repay the entire coupon
  • Besides JPMorgan, Aditya Birla Real Estate fund, ICICI Prudential, Edelweiss do such deals

Credits Business Standard

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