DLF plans to cut debt by one-third through PE deals, REITs

New Delhi: DLF Ltd, India’s largest real estate developer, plans to cut its debt by a third by raising Rs.7,000 crore through two private equity (PE) deals and two real estate investment trusts (REITs) in the next 18 months, two people aware of the plan said.

The company expects to raise Rs.6,000 crore through REITs and Rs.1,000 crore through PE deals, according to both the people, who spoke on condition of anonymity. One of the PE deals will be with Blackstone Group LP, the world’s largest PE firm, and is expected to be finalized by September, said one of the two people. This person is directly involved in the deal negotiations.

This deal will likely see Blackstone take a stake in one of DLF’s projects in south India— in Bengaluru, Chennai or Kochi—said the first person.

The second PE deal will be concluded by the end of the financial year and will likely involve Blackstone and another investor picking up a stake in a DLF project in the New Gurgaon area, this person added.

DLF, which had a net debt of Rs.20,965 crore as of 31 March, is raising money to reduce its liabilities. Two weeks ago, the company signed a definitive agreement with PVR Ltd to sell its multiplex chain DT Cinemas for Rs.500 crore—part of a strategy to divest assets not core to its main property development business.

The company plans to file an application by December to launch an REIT in the office segment in Cyber City, Gurgaon, the first person quoted above said. The second REIT will be filed in the next fiscal year for its Pune properties, he said.

DLF officials met potential investors in Singapore two weeks ago to discuss the consolidation of the company’s south India properties and filing for REITs.

REITs are proposed as listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and list them as a trust. Investors earn returns from value appreciation or rental income from these projects.

REITs will also give overseas investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreigners. The 2014 budget took the first step in encouraging the trusts by providing partial tax pass-through to them. In the 2015 budget, finance minister Arun Jaitley said the rental income of REITs from their own assets will have pass-through facility.

Reached for comment on the fund-raising plans, a DLF spokesperson declined to respond to “market speculations”.

“Directionally, we have already stated that we are exploring the road map to REITs and are also exploring private equity participation at the project level. The same has been disclosed in our quarterly analyst presentations,” the spokesperson said in response to a detailed questionnaire.

A Blackstone spokesperson, too, declined to comment for this story.

On Monday, DLF proposed raising as much as Rs.5,000 crore through a sale of non-convertible debentures (NCD) on a private placement basis.

DLF, however, may not go ahead with the NCD sale, for which it has secured board approval, the second person cited above said. “It may only be used in a situation when other options to raise funds are exhausted,” this person said.

According to Sharad Mittal, director and head (real estate investment), Motilal Oswal Real Estate Fund, there are two key challenges around REITs.

One, if the asset is owned through a REIT-controlled special purpose vehicle, it’s still subject to corporate tax and dividend distribution tax, which limits the pass-through nature of REITs; second, investor return expectation from such products would be one to two percentage points more than what they stand to earn from risk-free government bonds. “(I am) not sure if developers will look to exit at those levels,” Mittal said.