Real estate private equity (PE) funds will trim their size and investment focus as property cycles shorten and investment avenues rise in a slowdown, be it slum development, office rentals or lending money to cash-starved real estate developers. Many of them who made losses in the previous slowdown are learning from past mistakes and repositioning with focused investments.
?Funds cannot carry one strategy for three years as property cycles have become shorter,? says Shobhit Agarwal, joint managing director, capital markets at property consultants Jones Lang LaSalle Property Consultants (JLL). ?The year 2006 has seen very large funds that were pan-India, which is not possible in 2012.?
Smaller funds will bring focus for fund managers to invest in specific projects like slum development or in office rentals, rather than investing across the real estate spectrum. ?Smaller funds can be deployed easily,? says Agarwal of JLL. General partners or fund managers which manage the money of limited partners (LPs) or investors will free them from the pressures of uncommitted funds.
Milestone Capital Advisors and Kotak Realty Fund have opened focused debt funds. Kotak had raised a R523-crore Yields Fund, a specialised PE fund to lend money to real estate developers with assured returns.
Roughly 15 real estate funds are planning to raise funds, according to a JLL report released in December.
Private equity funds have invested $784 million (R4,077 crore) between January and October 2011, a shade lower than $817 million (R4248 crore) in the same period previous year, data from VC Circle, a data provider for M&A and private equity investments, show.
The switch to smaller funds are driven by unpredictable returns from the volatile real estate market. Real estate developers are hit by high interest rates, buyers postponing home purchases, cautious lenders and delays in approvals which push up costs.
?Funds are defined on the basis of their LPs? risk appetite; some are conservative while others take more risk,? says Ramesh Jogani, managing director Indiareit Investment Advisors promoted by healthcare group Piramal.
Indiareit is raising R500 crore to invest in real estate developers which redevelop slums and rental properties in Mumbai. ?These funds are a substitute for Real Estate Investment Trust or REIT in India,? says Jogani.
?There has been a rise in focused strategy funds recently and slum rehabilitation, debt and office funds are now coming up,? agrees V Hari Krishna, director of investments at Kotak Realty Fund.
Some consultants say new funds with shorter size and focus are born out of past mistakes.
?Indian real estate market is not deep enough for specialised funds,? says a property fund manager with a foreign private equity fund on condition of anonymity.?Many real estate funds have made losses in the economic slowdown and now feel the need to position themselves as a unique firm with focused investments.?
?Why would LPs give money to funds that are so narrow on their investment opportunities?? asks Vikram Utamsingh, executive director and head of private equity at consultancy KPMG India.