Indian Builders Chase Costly PE Fund Loans, Knight Frank Says

Indian Builders Chase Costly PE Fund Loans
A real estate agent draws the curtains inside a display unit at a high-rise luxury apartment block in New Delhi, India. The nation’s real-estate companies are selling assets as interest rates as high as 30 percent and a slowing economy make it harder for them to repay debt. Photographer: Prashanth Vishwanathan/Bloomberg

Indian developers will borrow about $1 billion from private equity funds this fiscal year at rates higher than banks, which are cutting loans to builders, according to Knight Frank LLP.

Buyout funds have ploughed 12 billion rupees ($252 million) into developers’ projects in the past three months, and may invest as much as 35 billion rupees by March 31, said Amit Goenka, national director of capital transactions at the Indian unit of London-based Knight Frank. Private equity deals are getting transacted at internal rates of returns, or the yield of the investment, of 25 percent to 30 percent.

“The cash-flow situation is fairly precarious with most developers,” Goenka said in an interview in Mumbai. “Private equity is the last resort for funding when developers can’t get money anywhere else.”

Developers are facing a liquidity squeeze after sales dried up and banks and finance companies stopped funding them, Goenka said Sept. 13. They also are struggling with surging borrowing costs after India’s central bank raised interest rates 11 times since March 2010 in an attempt to tame surging inflation, making money developers need more expensive.

The Reserve Bank of India will probably raise rates by a quarter of a percentage point at its policy meeting tomorrow, according to 11 of 12 economists in a Bloomberg survey.

Soaring Rates

The combined net debt of India’s 11 listed developers rose 15 percent in the 12 months through June to 385 billion rupees, according to Mumbai-based Edelweiss Securities Ltd. The nation’s real-estate companies are selling assets as interest rates as high as 30 percent and a slowing economy make it harder for them to repay debt.

DLF Ltd., the biggest developer, is planning to raise as much as 100 billion rupees from sales of hotels and land after interest costs jumped almost 10-fold since 2008 to a record, data compiled by Bloomberg show.

“The Indian real estate market is beset by reduced growth expectations” and a shortage of cash, Ramesh Nair, Mumbai-based managing director for western India at Jones Lang LaSalle India said last month. “Developers will be under pressure to reduce their debt. Projects of troubled developers will be acquired by other players.”

Parsvnath Developers Ltd. raised 5.2 billion rupees from private equity funds including SUN-Apollo India Real Estate Fund LLC, JPMorgan Chase & Co. and Red Fort Capital, the company said in May. Ansal Properties & Infrastructure Ltd. raised 2 billion rupees from Red Fort for a residential project in Gurgaon in February.

Demand Slumps

Demand for homes in Mumbai, India’s most expensive real-estate market, fell to a 30-month low in the three months though June, according to Liases Foras Real Estate Rating & Research Pvt., a real-estate research company.

Sales fell 11 percent from the previous quarter to 8 million square feet, the lowest since the three months ended December 2008, while New Delhi and its surrounding areas had a 19 percent drop to 22 million square feet, according to Liases Foras. Unsold units climbed to all-time highs in both cities.

Private equity funds have bought assets of developers worth about 25 billion rupees this year, Goenka said. Developers will need to repay 260 billion rupees of debt this fiscal year, he estimates.

“Markets are going to be very tough,” Goenka said. “If developers are declared non-performing assets by banks there will be a huge credit risk. Private equity too might shy away from funding them if they are declared non-performing assets. That could end up being a deal breaker for funding them.”

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