Buybacks by promoters is turning out to be the only available route for private equity exits in the real estate sector. Slowing consumer demand, stringent conditions for raising debt, rising interest rates, and opacity have rendered the sector with a less than positive image for investors.
Out of the 19 buyback exits in 2011, there were nine real estate deals. In all, the sector had just 14 exits. January has already witnessed a marquee buyback by Mumbai-based property firm Lodha Developers from Deutsche Bank, predicting a similar trend for the next fiscal.
Experts point out that funds are essentially cashing out of their investments made during the heydays of Indian realty in 2006-07. Sachin Sandhir, managing director, Royal Institution of Chartered Surveyors says exits have to do with the lifespan and investment cycle of the fund. ?In the prevailing market with projects not reaching the desired development stage in the requisite time and secondary deals not attracting new PE investors, buyouts by promoters remain a natural option.?
PE firms will have to exit the project and developers will have to stay invested, points out Ashish Joshi, managing partner, IL&FS Milestone Realty Advisors. Promoters are generally funding these buybacks by a mix of customer advances from new projects, internal accruals, divesting in non-core projects, contractually built in agreements for refinancing of projects through mezzanine funding and even raising fresh debt from the market. Anuj Nangpal, director, investment advisory, DTZ says promoters are also funding these buybacks through third party investors including a new PE fund. ?It is a simpler process than going in for a structured secondary PE deal. The promoter is in the best know how of the project details. For a secondary deal, the new PE investor also has to obtain an NoC from the promoter. In such a scenario the promoter becomes the natural buyer.?
The rider, however, for the sector is that not all promoter buybacks are standing to be counted. Within the real estate investment space, there are a slew of buybacks that have happened at par or even for lesser amounts, spelling a realty check for future investments. Nitesh Estates bought back HDFC’s 50% stake in its Bangalore based Nitesh Indiranagar Mall for $24 million. HDFC Property Ventures had invested $20 million in the project in 2009. Kapstone Constructions bought back Trinity Capital’s stake for $20.07 million. Trinity Capital had invested $20 million in the project in 2006. Also Rustomjee Constructions bought back Trinity Capital’s stake for $3.25 million. Trinity had invested $7.05 million in the project in 2008.
Sandhir says, ?In the current real estate scenario, funds are settling for lower internal rate of return and as long as they are getting the principal repayment back along with some margin money, they are exiting the investment.?
Investor mandate is clear ? conserve capital, capital protection is paramount. As Dinesh Gupta, VP finance, Ansal Developers sums up, ?In the prevailing market not all projects will give returns, the idea is to cut future losses rather than pumping in money. And buyback exits should be seen as opportunities for investment rather than a case of just loans being repaid”.