The Hindu Business Line : Pvt equity deals in realty down to a trickle in Sept

Realty companies have been facing a severe cash crunch with bank loans drying up. Their problems have been compounded by plunging sales and weak demand.

Moumita Bakshi Chatterjee

New Delhi, Oct. 28 Private equity (PE) deals in the real estate and infrastructure space grossed about $3 billion in value during the first nine months of 2008, over 9 per cent lower than the year-ago period.

Moreover, PE investors, who had been cherry-picking realty deals earlier this year, appear to have tightened their purse strings now, with September seeing only two transactions worth $12 million compared with August, when $427 million of PE funds was infused into various projects.

According to data compiled by Grant Thornton, while the number of deals during January-September was higher at 45 against last year’s 39 deals, the average ticket size of the transactions has come down substantially in the first three quarters of 2008, reflecting softening valuations across the crisis-ridden real estate sector.

Cash crunch

Realty companies have been facing a severe cash crunch with bank loans drying up. Their problems have been compounded by plunging sales and weak demand. Even the festive season has been laggard with developers witnessing 40-50 per cent lower volumes this season compared to the previous year. While leading real estate developer Parsvnath has said it would shortly weed out ‘non-performers’ as part of its cost-cutting measures, even Unitech — which categorically ruled out any retrenchments — gave lower increments to employees.

Treading with caution

“With banks going slow on lending to the real estate sector, realtors are turning to PE funds. However, as realty demand is slow, and the projections by builders on selling price and velocity of sales turn out to be less than anticipated, the PE funds too are treading with caution,” said Mr Om Chaudhary, Managing Director of Fire Capital, which has already committed $150 million into seven projects and would invest another $50 million, before raising its next fund of close to $500 million in 2009.

Mr Chaudhary said developers, who had acquired land banks at astronomical rates, are still unwilling to lower valuations, despite the turmoil in the market.

Realty opportunity

“The situation would get even more challenging in the next few months driven by the general downturn in the market. But this also offers a great opportunity for PE investors to look at real estate industry again,” said Mr Harish H.V., Partner, Transaction Advisory Services, Grant Thornton.

In August this year, Atul Ruia-promoted real estate developer of Phoenix Mills raised €200 million (about Rs 1,300 crore) from a German real estate fund MPC Synergy, while September saw BTS India Private Equity Fund announcing an investment in Saisudhir Infrastructures Ltd.

Other PE transactions inked this year include Lehman Brothers Real Estate Partners’ $175-million investment for 50 per cent stake in the initial phase of Unitech’s Western Expressway project in Mumbai; Axis Bank’s investment in Lavasa Corporation, a subsidiary of Hindustan Construction Company, in the form of convertible preference shares and convertible debentures; and Citi Property Investors’ infusion of about $160 million in four SEZ projects of real estate firm BPTP Group.

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