HDFC plans special situations fund to invest in stressed realty projects

Bengaluru: Housing Development Finance Corp. Ltd (HDFC), India’s largest mortgage lender, is setting up a new venture to raise capital for a special situations fund that will invest in stressed projects in real estate. HDFC, which will be a sponsor to the fund, is in talks with investors to raise capital through the alternative investment fund (AIF) route. Kaizad Hazari has been appointed as chief executive officer-designate for the venture.

“The objective is to find opportunities in real estate stressed assets, and then to take over these projects and turn them around,” said Keki Mistry, vice chairman and chief executive, HDFC, told Mint. Mistry, however, did not disclose the likely size of the fund.

The real estate sector is an area of core competence for HDFC and its distressed-themed fund comes at a time when the residential sector, in particular, has undergone a nearly five-year long slowdown.

Moreover, a stringent regulatory regime under the real estate regulatory authority (RERA) and the after-shocks of the goods and services tax (GST) and demonetisation, have led to a prolonged slowdown, increasing debt for developers and unsold inventory with several projects across cities being either stuck or delayed.

HDFC is scanning the market to identify projects that are stuck, and where it can help in completing them and offer possession to retail investors and buyers. As an investor, the new fund can either continue with the existing project developer or bring in a new developer.

“We will look at the top 6-8 cities and evaluate opportunities across segments, including residential, commercial office and hospitality,” said Hazari.

HDFC currently handles real estate investments through HDFC Capital Advisors Ltd, which had raised $550 million in December, in an initial closure of its second affordable housing fund. It also has HDFC Property Fund, which is planning a $500-million overseas fund.

HDFC is not the only one. Other investors are also eyeing similar opportunities.

ASK Property Investment Advisors has its ₹900 crore ASK Real Estate Special Situations Fund for incomplete housing projects either due to sluggish demand or the developer’s inability to complete the project due to lack of capital.

“There is a scope to invest in stressed projects as the sector further consolidates and smaller developers face cash flow pressure, forcing them to surrender to established developers,” said Amit Bhagat, chief executive and managing director, ASK Property Investment Advisors. “With large developers, private equity investors and asset reconstruction companies eyeing this space, there is a fair bit of competition.”

“Funds looking at distress opportunities can get many projects, which can be bought at discounted NAV (net asset value),” said Rajeev Bairathi, executive director and head of capital markets at property advisory firm Knight Frank India.

“Today, when sales are not picking up, putting in equity and getting the project completed by bringing in another developer is a good solution to the ongoing crisis.”