As turbulent stock markets threaten to delay the initial public offers (IPOs) of several cash-strapped real estate companies, private equity firms are sensing an opportunity to step in as an alternative source of funding for them.
These investors have been sending feelers of late to some developers, which urgently need money to retire debt but may not be able to find buyers for their shares in IPOs in volatile markets. These funds are willing to loosen their purse strings now that valuations are beginning to look reasonable after the recent spell of stock market correction
Though many realty companies may not be too keen to induct a private equity firm as a stakeholder, some of them could be forced to sell a stake to one, as they have little room to raise further money through loans, according to investment bankers.
“While some developers may be able to sail through in difficult market conditions due to their superior land bank, some may not because of their low-quality assets,” said a top official with an investment bank, specialising in real estate. Companies that are in the queue to tap the primary market include Emaar MGF, Lodha Developers, Sahara Prime, Lodha Developers, Oberoi RealtyBSE -0.39 %, Kumar Urban, Prestige EstatesBSE 4.22 %, Vatika, Neptune Developers and BPTP, among others.
“I do not think IPOs of developers with land in Mumbai will have any problem sailing through.. It will be the ones with land in Tier-2 and -3 towns, which will find it difficult. These companies may look for other options, if they are desperate for funds,” said Ashish Joshi, managing partner, real estate, Milestone Capital Advisors. Most developers had aggressively bought land through debt when prices were at their peaks in 2006 and 2007.
But, as demand for office and residential property dropped in 2008 following the global financial crisis, these developers were left with land bought at high prices. The rally in the stock market, starting March 2009, helped listed realty companies to emerge out of the crisis, as they sold stakes to reduce debt, but the unlisted ones continue to stagger.
The availability of money in the latter part of 2009, thanks to the sharp decline in interest rates, enabled many of these firms to stay afloat. But, with their debt touching intolerable levels and rates showing signs of hardening, developers have turned to share stake sale, as a source of funding. Real estate companies prefer raising money through IPOs to private equity funding, as the latter is considered expensive.
“Generally, private equity investors look at an IRR (internal rate of return) of 25% from realty companies,” said A Murugappan, executive director, ICICI Securities.
IRR, the mostly widely-tracked performance benchmark for private equity investments, refers to the yield of an investment, or the compounded rate of return on investment.
In 2008 and 2009, private equity firms demanded much higher IRRs in the range of 35-40% from these companies due to higher risk aversion. This led to a sharp fall in private equity investments in realty companies compared to that in 2007.
Source: Economic Times, New Delhi Edition