Private Equity – a safety sign for buyers ::Business Line

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A PE-funded project is vetted for compliance, risks studied and its ability to deliver assessed by experts.

Buying a home is one of the most important decisions in the life of a household. This decision, apart from financial ability, depends on the right selection of location and project. Selection of the project is fraught with uncertainty on account of project completion, regulatory compliance, size and amenities, for which the buyer is totally dependent on the developer. These risks are mitigated by Real Estate Private Equity (REPE), whose investment strategy involves not only taking care of the risk mentioned above, but also making sure of the financial viability of projects.

INVESTMENT STRATEGY

Decision to buy a house is mainly guided by earning capacity and capital contribution, apart from some other factors like marriage, job, and migration. Assuming that the buyer is able to afford a house based on earning capacity, the next important task is to find a right project and location. Choice of location is often guided by proximity/travel time to work, social infrastructure like education, recreation, healthcare facilities, security and demographic features of the area. Sometimes, when affordability forces a buyer to look for locations in extended suburbs, the likelihood of development of social infrastructure also influences the buying decision.

Domestic REPE funds are pooled vehicles registered with the Securities and Exchange Board of India. The duration of these funds is typically 5-7 years. REPE comprises of professionals with experience in real estate, construction and asset management experience. These funds have a defined investment strategy which defines investment criteria, financial norms and location strategy. This mitigates concentration risk of area, developer and segments.

Residential real estate investment strategy involves selection of micro-markets which are established/upcoming growth corridors in a given city/region. Micro-markets are selected based on extensive research of factors like employment growth, infrastructure developments like roads, railways, metro railway, airport facilities, healthcare and educational facilities. Investment based on these factors addresses the selection of location by homebuyers who are generally more biased towards the existing place of stay rather than an impartial study of locations.

SUCCESS OF FUNDS

Success of REPE funds is based on their ability to invest in quality projects with timely completion. This involves proper assessment of developer risk and completion risk. Developer risk is more on account of overleveraging and over-commitment. Completion risk is on account of quality and committed time duration.

Assessment is based on criterion like developer profile, construction quality, execution record, financial position, legal and regulatory history. The projects are also examined with respect to regulatory approvals received and proposed plan. Financial viability of project makes sure that a proper estimate of cost and pricing is undertaken. Proper analysis of these factors helps in selection of a good developer, which mitigates completion risk and developer risk.

Most of the investments involve creation of Special Purpose Vehicles (SPV) and provision of controls to REPE funds at SPV level by virtue of their financial investment. Thus, only projects with high probability of completion with requisite quality become eligible for investments. Since the concerns of buyer with respect to developer and project are addressed, the buyer could rely on buying homes in such projects where REPE funds are invested.

The true test of a REPE fund rests on its ability to monitor execution and timely completion of projects. Private equity funds are manned by Asset Management professionals with hardcore construction experience to monitor day-to-day progress of projects invested.

These experts also manage the risk of diversion of money, which mitigates completion risk. Disbursal of funds by REPE also depends on achievement of project milestones. Timely completion and compliance with regulations addresses the major issues of the home buyer. Investments by REPE funds thus help to address concerns of the home-buyer. It would thus be more prudent to buy in projects invested by REPE funds.