Walton Street BlackSoil Real Estate Debt Fund recently made an exit from its investments in a South India-based developer and is looking at a final close of its second fund by the end of the year .Vinit Prabhugaonkar, managing partner of WSB Real Estate Partners (earlier known as Walton Street India Real Estate Advisors), the fund manager of the fund, discusses with Raghavendra Kamath the mood of investors in property funds and the state of the residential real estate segment in the county. Edited excerpts:
Can you talk about your second fund?
Our second fund has a target corpus of Rs 500 crore and a green-shoe option to raise another Rs 250 crore. We would likely announce our final close later this year. We continue to ramp up our asset management business and provide attractive risk-adjusted returns to our investors.
How are investors in property funds looking at the sector given the increase in interest rates and property prices?
Nowadays, they are looking more positively at the sector because of a set of reasons. Since 2016, after GST, RERA, Benami Act and IBC, there is a greater transparency in the real estate sector. All these measures have infused confidence into investors in the real estate. Investors’ sentiments have improved for this asset class. There has always been direct exposure of high-net-worth individuals (HNIs ) and ultra HNIs in real estate. However, we have seen the trend towards institutional investment approach through alternative investment funds (AIFs). Since 2014, there has not been improvement in sale prices till 2020. But now, with increase in prices, the confidence of investors has gone up further. We have garnered good traction from the investors in our second fund.
Since public sector banks and NBFCs have started lending to real estate again, do funds like you have a good opportunity to lend now?
Today, the world is a different place, especially after the 2018 IL&FS crisis. We are still in the void left by NBFCs post this crisis. The space offers substantial scope for the AIFs .Even if NBFCs come back, we won’t see the glut of funds that we saw before 2018.
With interest rates going up, have you increased your internal rate of return (IRR) expectations?
It has not impacted our business and we continue to operate in the range of upper teen IRRs at the investment level. We were lending at these rates even before RBI raised rates. We don’t intend to take higher risks to earn higher returns.
How are the residential property markets behaving post rate hikes.
We have not seen any significant adverse impact on the sales in our portfolio companies. Sentiments of buyers are positive and we have not seen footfalls and conversions coming down. We had best affordability among buyers in a decade, stagnant prices since 2015 and developers giving discounts to boost sales. Additionally, the WFH culture triggered by the pandemic, growing IT salaries, etc. have had a positive impact on mid-market housing demand. So far, 90 basis point increase in interest rates has not had adverse impact on buying decisions of buyers.
Many developers are talking about joint developments and JVs to keep debt levels under check. Has it diminished demand for debt.
Developers require capital to lock-in lands, obtain approvals and also commence/complete construction. Hence, we continue to see a healthy deal flow wherein developers are approaching us for flexible capital pool.
How do you protect your principal/investments with so much volatility in the sector.
If a developer has a lot of debt and we find his inability to repay that by paying his assets, we won’t touch it . We do SPV-level investments where we ring fence our money if anything untoward happens. We do not do name lending or balance sheet lending . We take minimum two months between doing the due diligence and cutting a cheque. We want loans to be paid out of cashflows of the projects and not from other sources.