PE firms spot profits in Mumbai redevelopment

With opportunities arising in the redevelopment market, mainly in slums and housing societies, private equity (PE) players and real estate firms are launching funds for this segment.

Azure Capital Advisors is raising a Rs 500 crore (Rs 5 billion) PE fund to invest in redevelopment of small societies.

Unitech is in the market to raise a Rs 300 crore (Rs 3 billion) PE fund for redevelopment in Mumbai. Called Mumbai Redevelopment Fund-I, it will focus on all types of redevelopment projects. It will invest across micro-markets, apart from slum redevelopment. The fund aims to invest in five redevelopment projects.

Akruti City has also expressed interest in raising a fund for slum redevelopment. Earlier this year, Kotak Realty Fund invested around Rs 100 crore in a slum redevelopment project by Akruti City. In 2006, Trinity Capital invested a similar amount in a project undertaken by Lokhandwala Builders.

"The redevelopment space in Mumbai presents tremendous opportunities. The government is encouraging re-development of Mumbai to improve physical and civic infrastructure. Redevelopment is gaining prominence also due of scarcity of land in the city," said a Unitech spokesperson.

Shailesh Ghorpade, managing director and CEO of Azure Capital Advisors, says there is a huge prospect in this space as Mumbai has over 40,000 buildings that need to be redeveloped.

The fund will focus on rebuilding existing housing societies, which have a floor space index of 1:1. "Since this has been raised to 2.5:3, there is an opportunity.We will share a part of the new FSI with the societies," says Ghorpade.

"The fund will invest a part of Rs 125 crore (Rs 1.25 billion) in slum redevelopment. We will operate in area which is not more than 2,000 sq ft," Ghorpade added. The fund is likely to announce its first closure of Rs 150 crore (Rs 1.5 billion) this month.

"So far, mainly retail investors have participated. We will look to invest Rs 35-40 crore (Rs 350-400 million) each in residential projects. A part of the first fund is being raised from within the firm and the rest from HNIs (high net worth individuals) and other investors," said Ghorpade. The firm has seven shareholders, including Ghorpade.

Azure is expecting a return of 35-40 per cent. "We expect to give an IRR (internal rate of return) of around 20 per cent to our investors," he added

"In general, slum redevelopment projects are attracting good investments. Some funds raised by realty players are for their captive projects," said Arun Natarajan, CEO of Venture Intelligence.

While the returns are high, industry watchers say the same holds true for the risks.