Anand Rathi, Knight Frank set to raise rental yield fund
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Anand Rathi Financial Services Ltd (ARFS) has tied up with real estate consultancy firm Knight Frank India Pvt.Ltd to launch a realty-focused private equity (PE) fund.
The fund targets a corpus of `250 crore, with an option of raising another `100 crore, ac- cording to executives at both firms. Knight Frank will be the exclusive investment adviser to the fund.
The fund will be based on rental yields and invest in commercial real estate. Rental yield funds typically invest in properties that have been rented out, based in the premise that such properties have lower risk compared with proper- ties still being developed. Also, rented properties provide a regular income.
“In the commercial space to- day, there is excessive supply and under investment, but in a two- three year time frame, demand will exceed the supply and such properties will give good returns,“ said A.V Sri- kanth, executive director at ARFS, explaining the rationale behind launching the fund, which is targeting an internal rate of return (IRR) of 18%.
“We have raised approximately `160 crore and can expect a first close sometime next month.“ While Anand Rathi will raise the capital from domestic investors through its private wealth management portfolio, Knight Frank will be the fund advisor and will undertake deal sourcing, closure and exit. An advisory commit- tee, comprising Pranay Vakil, chairman, Knight Frank India, Anand Rathi, founder and chairman, ARFS, Pirojsha Go- drej, executive director Godrej Properties Ltd, and M.L Bhakta, senior partner Kanga and Co. has been formed. An in- vestment committee has also been constituted.
The fund will focus on in- vestments in Mumbai, the national capital region, Banga- lore, Chennai and Hyderabad, with a larger focus on prime properties in Mumbai and around New Delhi.
The rental yield fund space is poised for growth, but is constrained by a dearth of good quality properties, said Anshuman Magazine, chair- man and managing director, South Asia, at real estate consultancy firm CB Richard Ellis (CBRE). “In developed markets, properties are larger and are hired by larger corporates and institutions, whereas in India smaller properties are hired.“ Knight Frank last year shelved its plans to start a PE fund due to tough financial conditions following the global economic crisis. Instead, it has started offering investment portfolio management solutions.
In this model, it does not participate in fund-raising and investor relations, but only does the deal sourcing and helps set up investment and advisory committees, said Amit Goenka, national director, capital transactions, Knight Frank India.
“There is a huge shift in people wanting to move from the development story to a more stable story.... Globally, funds don't invest in underdeveloped assets,“ said Goenka, predicting there will be more PE funds looking to adopt the rental yield strategy.
IL&FS Milestone Fund, a venture of IL&FS Investment Managers Ltd and Milestone Group, has two rental yield funds under it. Knight Frank is also in talks with another domestic fund, but Goenka declined which one, citing early stages of talks.
PE investments in real estate have increased only marginally this year, with 25 deals worth $990 million from January through August, against 20 deals worth $602 million in the same period in 2009, according to data from Venture Intelligence, a research service focused on PE and mergers and acquisitions.
The reason, said Magazine of CERE, is that the fund-raising market is still tight. “The domestic fund-raising market depends on the fund manager raising it and is much better compared to the international market which is still very tight,“ he said.