Bengaluru: Private equity (PE) funds are increasingly buying apartments in bulk at steep discounts, taking advantage of high inventory levels with property developers grappling with tepid sales.
At a time when debt lending to real estate is the norm, realty funds are also willing to put equity in such deals, considered to be riskier than normal debt transactions.
For instance, property advisory JLL India, through its investment arm Segregated Funds Group, will soon start raising a new, second fund of around Rs.400 crore that will look at buying apartments in bulk.
“The market is soft and sales being slow, such transactions offer higher risk-adjusted returns. This is the space to be in and there are significant opportunities. The new fund will look at bulk-buying in projects that are about to be completed,” said Mridul Upreti, chief executive, Segregated Funds Group. “This is an equity bet, and it is the safest bet you can take.”
While real estate funds have been selectively looking at these bulk-buying deals, Indiareit Fund Advisors Pvt. Ltd launched an apartment-themed fund last July, one of the first to dedicate an entire fund to buying apartments in projects under construction so that it can start selling after 18 months, when the developer begins to sell these apartments.
The fund has raised around Rs.530 crore and has closed three transactions so far—two in Mumbai and one in Chennai, deploying 25% of the corpus.
Khushru Jijina, managing director, Piramal Fund Management, said that the entire premise and strategy of the apartment fund is to take advantage of the current market situation and align itself with the developer.
“By identifying and purchasing apartments at an attractive cost, we are able to generate an attractive risk-adjusted return over our target hold period and the developer is able to use the funds to progress construction and delivery and is not time-pressured to sell at an adverse price in a market where (sales) velocity is slow,” Jijina said.
Aditya Birla Real Estate Fund has bought residential stock worth Rs.85 crore in a suburban Mumbai project being developed by Radius Developers in a structured equity transaction, said two people familiar with the development.
This is Aditya Birla’s third bulk-buying transaction from its fund, after Ozone Group’s Metrozone project in Chennai, where Blackstone Group Lp has also done a similar transaction, and a Kohinoor Group project in Mumbai.
“The fund has picked up around 70,000 sq. ft of space in the project, which is currently under construction. We will use the capital for project development,” said Sanjay Chhabria, founder of Radius Developers.
Aditya Birla Real Estate declined to comment.
On a pan-India level, inventory remained unchanged at 39 months from last quarter. In the March quarter, the National Capital Region (NCR) market showed the highest inventory level at 71 months, while Pune was the lowest at 18 months. Mumbai Metropolitan Region (MMR) stands at 46 months of inventory. In an ideal condition, a market should maintain 8-12 months of inventory, according to Liases Foras Real Estate Rating and Research Pvt. Ltd.
PE funds are also adopting various ways to participate in the bulk-buying space. ICICI Prudential Asset Management Co. Ltd has done three transactions which involve different forms of apartment buying in Mumbai and Bengaluru.
First, the fund has bought apartments in a project in the form of a joint development agreement (JDA) with revenue sharing from the topline. The second kind is where returns are structured in a way that involves part coupon and part apartments. Third, it has identified under-construction stock and after a 12-month lock-in, the apartments are sold and first principal payment and agreed target returns come to the fund.
“While this involves higher risk than debt funding, there is an element of upside available as well.
Investments will make returns if the project makes money and hence selecting projects with good success factor is important,” said Rahul Rai, head, real estate, ICICI Prudential Asset Management Co. The firm is looking at such opportunities in Pune, Chennai and NCR, too.
“We are exploring two kinds of possibilities—buying ready stock in a project and under construction stock. Both have different risks and returns.”
The concern, however, is over what kind of returns such funds will get if projects get delayed and prices don’t appreciate much.
“While bulk-buying of apartments is opportunistic, there are inherent risks such as what if the property market doesn’t improve and the uncertainty in price appreciation,” said Rajeev Bairathi, executive director, capital transaction group and north India, at property advisory Knight Frank India.
Bairathi said that this has to be a long-term product, where the fund has to be patient about the time of exit and risks involved.