PUNE: Pune has been the fastest growing city for over a decade now, second only to the metros. It has been able to sustain this status mostly because of the well-established manufacturing sector and the thriving IT segment that has made the city its home. There is no dearth of local workers with professional qualifications as the city has numerous colleges offering courses in varied disciplines. Pune is also popular as an ideal city to reside in, not only because of the good schools and colleges but also due to its pleasant climate.
Consequently, the demand for residential and commercial real estate in Pune is massive, though it has slowed down lately due to the weak economy. The huge demand and potential for development has attracted many real estate developers, and the city is today witnessing different projects – ranging from huge townships, standalone buildings, luxury projects to big commercial complexes. This development has not been restricted to the main city only but is spreading to its peripheral areas too.
Developers look for clean money
Typically, developers fund their land deals through money from family, friends and angels and arrange for construction finance through revenue accruals from sales or bank finance. However, according to Sanjay Deshpande, director, Sanjeevani Developers, “It is always difficult to generate funds as banks have stringent lending norms. The developers often have to borrow money from not-so-upfront sources. Therefore, private equity (PE) is always welcome as such funds bring professionalism, apart from good money.”
Also, the advantage of PE money is that the developers get more flexibility in terms of when to launch a project for sales. For instance, they can start the sales process much later during the construction stage, when the sale prices can be much higher as there is construction on the ground and much higher visibility for potential buyers. This increases the total profitability of the project for the developer and for the PE as well, since the latter gets good returns.
Pune remains an attractive destination for PE
According to Dr Vikas Gupta, executive vice-president, EVP-traded markets and investment research, ArthVeda Fund Management Company, “Pune remains attractive for PE. It is a growing city with a lot of immigration of high income professionals due to the IT industry, the auto cluster and educational institutions catering to graduation as well as higher learning. However, each investment has to be weighed based on the merits of each project through its location, the developer’s vision, and land valuations and expected sales prices. Selectivity is the key for the PE investors.”
Private equity investments in and around Pune
Blackstone invested $82.6 million in Panchshil Realty’s Eon Free Zone.
India Asset Growth Fund Series I invested in residential real estate projects in Pune apart from other metros.
IL&FS Milestone Realty Advisors Pvt Ltd invested in an IT office project.
The fund, IL&FS Milestone Fund II, invested Rs 90 crores in real estate firm SumaShilp Ltd’s Downtown – The City Centre in Pune.
Kolte Patil, along with ICICI Venture Fund Management Company Ltd, is developing a residential project at Wagholi.
K2A Residential Ltd, a group company of Yatra Capital, an Amsterdamlisted company, has invested in Kolte Patil Real Estate Private Ltd through its real estate fund for a residential project at Kharadi.
India-based HDFC Realty Fund and Peninsula Land Ltd are working together.
Mauritius-based Paracor Capital Advisors, US-based hedge fund Och-Ziff Capital Management Group LLC and India-based ArthVeda Fund Management Company also have investments in the city’s realty segment.
PE investing trends
Private equity funds are more interested in investing at a later stage of the project rather than the initial stage, so that their investments can start giving returns soon. Several foreign funds earmark amounts for investing in assets at the development stage and those which start generating yields without a time lag.
Also, there is a huge demand for mid-income housing in Pune and private equity investors are expecting good returns on their investments. ArthVeda Fund Management Company has invested in a couple of such residential projects in the city and is confident of generating good returns for its investors. Several private equity investors also term this as social investing since the growing middle-class is looking for a decent residence at an affordable price. This can only happen if there is investment from the organised section of the financial sector that will not only keep the project affordable but also generate good returns for investors.
Deshpande says that he personally prefers private equity investments in his projects as they are professionals, understand the real estate business and do not impose unrealistic demands on him as a developer. He adds, “I would welcome more and more private equity to invest in the residential real estate segment in Pune, specifically in the mid-income housing as there is a huge demand in this segment.”
Pune’s proximity to Mumbai attracts investors
Mumbai is a three to four hour drive from Pune, a fact that has attracted many individual investors and private equity funds. Besides, Mumbai is a saturated market while Pune still has a great demand for residential housing, be it high, middle or low-end. The developers in the city are also veering towards PE funds because as Gupta puts it, “Practically all other formal sources of funding have dried up.”
As the economy improves and demand for residential housing picks up, there will be a significant increase in demand for raw material for construction and interiors and various equipment and appliances. Significant demand can be expected in related sectors like electrical and electronics. These factors make a strong case for PE funds to invest in Pune’s real estate sector.