PE funds exit realty projects through refinancing route.

June 15, 2016

Private equity funds are exiting residential real estate investments primarily through the refinancing route at the end of their investment tenure as against the normal process of cash flow accruals. Instances of several fund exits in recent months show that delays in projects and slow sales have made it tough for property developers to repay PE investors, pushing them to raise fresh debt from new investors—both nonbanking financial companies (NBFCs) and PE funds. In a recent instance, ECL Finance Ltd partly refinanced Mumbai-based Neptune Group’s loan against its mid-income housing project Swarajya near Kalyan. Neptune, which had raised about Rs 120 crore from Milestone Capital Advisors Ltd in 2011, had to provide the latter an exit because the loan tenure was reaching its end. The project had been delayed, as a result of which even the sales momentum hadn't picked up. The refinancing of Milestone's loan by ECL Finance allowed the former to exit with a healthy internal rate of return (IRR) of 20%. “We have raised Rs 250 crore from Edelweiss (ECL is part of Edelweiss Group) to pay off Milestone and the remaining will be used for working capital because it's a large project of 50 lakh sq. ft," said Nayan Bheda, co-founder, Neptune Group. The spokespersons of both Milestone Capital and ECL Finance confirmed this. Despite a three-year-long slowdown in the residential real estate sector, unlike during the 2008 financial crisis, there is a lot of liquidity in the system.

Funds and NBFCs are keen to invest, but the money that is coming in is largely in the form of debt and refinancing and not growth equity. "Most private equity investments currently in the residential sector are refinancing deals and most of the investors' or capital providers' exits in the sector are through the refinancing route," said Vikas Chimakur- thy, director, Kotak Realty Fund. This also means that as debt or structured debt instruments predominate in the real estate sector now, as against the equity offerings in the boom years of 2005-06, investors see fewer opportunities for growth capital today. Chimakurthy said developers are facing liquidity issues due to slow sales, hence the option available to meet existing debt obligations is through refinancing or sale of land assets. "Existing debt obligations are getting replaced with longer ten ure loans, on the assumption that the market will revive in some time and the cash flows will service the refinanced debt," he said. A few of Kotak's own exits happened after the developer got its loan refinanced by other investors. Altico Capital India Pvt. Ltd, an NBFC, recently invested Rs 575 crore in projects of three developers—Bengaluru-based Unishire Urbanscape Pvt. Ltd, Marvel Group in Pune and Midcity Infrastructure Pvt. Ltd in Mumbai—of which two (Unishire and Marvel) were refinancing deals. Unishire, for instance, raised Rs 110 crore in debt from Altico with which it repaid the Rs 50 crore loan it owed Piramal Fund Management Pvt. Ltd.

"The rest of the money will be used as working capital," said Pratik K. Mehta, managing director of Unishire, which raised the Altico money against a portfolio of five projects. Sanjay Grewal, chief executive at Altico Capital, said, "As lenders, we remain cautious and primarily look at late-stage projects while refinancing, where the risk is far less. Also, it is important to look at the quality of the projects even during refinancing transactions." Refinancing to repay project loans, instead of self-generating project cash flows, can only be sustained for a period of time. It may leave an impact on developers' balance sheets because, effectively, they are only pushing back repayment schedules, inst ead of actually paying loans off, and also taking on more debt. "Principal repayments have started kicking in for developers who raised money from PE funds a few years back, and refinancing seems to be the only option available. Refinancing is like a survival mechanism but the developer also needs to push sales and cut prices wherever possible, speed up construction to overcome the interim pain in the sector till it sees a complete recovery," said Diwakar Rana, managing director, capital markets, India, Cushman and Wakefield. PE funds see a number of refinancing opportunities in the current scenario and each investor does its own risk analysis before taking a decision. "We are very particular about cash flow cover and high underwriting standards. Since we offer capital in various forms, we offer the flexibility to a developer to convert structured debt into construction finance which is cheaper, as the project progresses," said Khushru lijina, managing director, Piramal Fund Management. Last year, Piramal Fund Management and Altico Capital co-invested Rs 720 crore across multiple projects of realty firm Century Real Estate Holdings Pvt. Ltd in Bengaluru. The infusion was part of a refinancing arrangement by Century to provide an exit to Piramal Fund Management, which had earlier invested Rs 90 crore in the developer, and Kotak Realty Fund.

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