India real estate funds look to raise $1 bn from overseas

Written by Shubhra Tandon | Mumbai | Updated: Jul 28 2014, 13:22pm hrs
India Real EstateReal estate projects, selling houses at a rate of Rs 4, 000-6,000 per sq ft, which can be classified as affordable housing, appear to be seeing good traction in sales and cash flows.
Indian real estate-focused private equity (PE) funds are hoping to raise around $1 billion from overseas investors, two people familiar with the matter said. Last year, realty funds managed to mop up close to $370 million from international markets, data from VCCEdge shows. Among the key realty funds that are in the market for money include Red Fort Capital, ASK Group, HDFC Property Fund and JP Morgan, these people said.

Many global investors who had shied away from investing in the Indian real estate market are beginning to show interest now that the new government is putting a lot of emphasis on housing for all. An estimated $700 million has come in so far in the calendar year; while HDFC Property Fund has completed a first tranche of $250 million, of its latest fund, earlier this month, the ASK Group had picked up a more modest $50 million in January.

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Vikas Chimakurthy, director of Kotak Realty Fund, believes investors in funds, that are picking up stakes in commercial properties, are expecting returns of around 16%. For residential projects the returns expectation is around 22%, Chimakurthy told FE. Kotak Realty Fund closed an overseas fund in April, with $400 million in the kitty.

In the next round of fund-raising, Red Fort Capital is looking for $500 million to invest in commercial real estate projects while JPMorgan is believed to have a target of $250 million-$300 million by March end. That would be in addition to the $100 million that it is already believed to have got in 2013, industry sources indicated to FE.

If the proposed fund-raising materialises, it would be the first significant such exercise after a hiatus of four years. While a number of realty funds were looking to raise money overseas, they met with little success due to the ongoing uncertainty in the economic environment and the inability of existing funds to show returns to investors.

Moreover, exits were few and far between. Ambar Maheshwari, MD (corporate finance), JLL India, points out that several funds may announce exits from investments made five to seven years back. Profitable exits, he feels, will send out the right signals to investors. Sunil Rohokale, CEO and MD, ASK Group, told FE investments of up to $2 billion were exited in FY14. We are hoping that number should be in the range of $3 billion-$4 billion this year, Rohokale said.

Real estate projects, selling houses at a rate of Rs 4, 000-6,000 per sq ft, which can be classified as affordable housing, appear to be seeing good traction in sales and cash flows.

This could encourage some funds to exit, though the returns made on these investments are unlikely to be high. Rohokale said that exiting such investments could yield a return of around 15%, which although higher than what other asset classes like shares and gold have yielded in the last seven years, wasnt too high compared to the returns witnessed earlier in this sector.

The geographic profile of international investors betting on Indian real estate sector is also changing. According to Chimakurthy, a significant proportion of capital was being raised from the US in 2007. But in the last two years the proportion of funds being raised in the US has come down and new investors from Canada, Europe and Asia have entered the fray. There has also been a change in the profile of foreign limited partners that are committing capital to private equity funds, with a lot large pension funds and sovereign wealth funds participating, Chimakurthy said. Private equity funds are primarily targeting investments in residential development projects in the large Indian cities of Mumbai, Delhi, Bangalore, Chennai, Hyderabad and Pune.

In 2012, New Delhi-based Red Fort Capital announced that it had raised $500 million for investing in the Indian residential market, which was the only significant overseas fundraising in the real estate space between 2008 and 2012.JP Morgan declined to comment, while an email sent to Red Fort Capital remained unanswered.