Realty cos shun PE funding, opt for IPOs

The real estate sector's 16,000 crore IPO pipeline is putting a spoke in the wheel of private equity deals reports CNBC-TV18's Priyanka Ghosh. Several private equity deals have fallen through as companies seem to prefer the primary market route.

Unlisted real estate companies have always depended heavily on bank and private equity funding. Since banks have tightened lending, private equity players were scouting for some sweet deals. But that was not to be. In the last five months, 10 real estate companies have filed a draft red herring prospectus with SEBI, proposing to raise Rs 16,735 crore through public offers. Many companies which had been negotiating private equity deals have discarded talks and have opted for a public issue instead.

Irfan Razzack, Chairman and Managing Director, Prestige Group says, "It was a choice going in for an IPO. In fact even in PE it ends up going for an IPO and it offers an exit route for the investor in the next three to four years," adding, "the market was robust and there was good opportunity and so we thought we may as well go in for the IPO."

Prestige had been in talks with HDFC Property Fund before it filed for its Rs 1200 crore IPO. Sources say, it is seeking a value that is twice as much HDFC's offer. Fund houses admit that primary markets are offering a far lower cost to raise capital and that has led to lesser number of private equity deals in 2009.

V Hari Krishna, Director at Kotak Realty Fund says, "I would imagine that the numbers are south of a billion dollars as against the numbers in '06-'07 that were at least 5 to 6 times higher," adding, "public equity markets are providing capital to the companies, cost of capital at least 500 bps lower than the private equity money."

Developers point out that there is higher freedom in utilisation of funds if raised through the equity route. Fund houses are unwilling to pay for debt repayment or pending land payments. Typically, funds will put money in those projects and companies that will give them a high yield return and be profitable in the next three years. Therefore, there is also a mismatch of agendas.