Bangalore-based real estate company Prestige Estates will have to raise funds to buy out its partner, private equity fund Red Fort Capital, in the Exora Business Park project. Prestige Estates holds a 37.5% stake in the project, whereas Red Fort holds the remaining 62.5%. The project is expected to be valued between Rs 1,000-1,200 crore, according to property consultants, indicating that Prestige Estates needs to raise about Rs 625-750 crore to conclude the deal.
A few months back, funds such as Blackstone, Canada Pension Plan Investment Board, Xander, Brookfield and Goverment of Singapore Investment Corporation had expressed an interest in picking up Red Fort’s stake. But now, sources said, Prestige Estates has 90 days (starting July 1) to finalise the deal, failing which Red Fort Capital can invite an “expression of interest” again from other institutional investors. Exora Business Park earns a rental of Rs 130 crore annually, according to disclosures made by Prestige Estates.
Prestige Estates’ top management did not respond to calls made by FE to ascertain the development. However, at the time of announcing its corporate results last month, chairman and managing director Irfan Razzaq had said the company was keen on taking complete control of the project, “provided the pricing is right”.
Prestige Estates currently has a debt of Rs 3,400 crore on its books and in all likelihood will need to raise funds in order to buy out Red Fort’s stake in the project. This is likely to raise its debt levels. According to rating agency Icra’s report released in 2013, Exora Park itself has an accumulated term loans of Rs 515 crore, which partially offsets its excellent location and client profile. The 22-acre commercial office project is located in Marathahalli, Sarajapur outer ring road of Bangalore.
Market analysts said an enhancement of debt levels might result in Prestige’s stock taking a beating in the near term. Prestige Estates is the second-largest real estate company by market capitalisation. However, the outlook for this buyout remains positive. “The rentals in the area are in the range of Rs 50 per sq ft, which is likely to increase over a period of time, so the company will have the visibility of servicing the debt that it has to take on for the acquistion,” said Sandipan Pal, analyst, Motilal Oswal. Moreover, since Exora Business Park is a mature asset, with a host of marquee companies as clients, it makes little sense to bring in another private equity fund at this stage of development, Pal added. Typically, developers partner with private equity funds at the stage of building a commercial project because banks don’t lend for such developments.
Other analysts said the leverage Prestige has to take on will make sense only if the valuation of the entire project does not cross Rs 1,000 crore as it already has a gearing ratio of 0.9x.
Red Fort Capital had invested in the project way back in 2007 and therefore, wants to exit its investment because the duration of its cycle of investment is now up. Prestige Estates had listed the company in 2010, raising Rs 1,200 crore.