PAG bets big on Indian real estate as NBFCs go slow on developer loans

Investor lent Rs 3,000 crore to property developers last year

PAG — an alternative investment firm focused on Asia-Pacific (APAC) — has taken a liking to Indian real estate, entering into multiple debt deals with property developers in the country. This comes at a time when most domestic non-banking companies (NBFCs) are going slow on lending to property developers.

PAG loaned about Rs 3,000 crore last year, said a senior real estate executive, adding it had become one of the single largest lenders to developers in 2022. 

PAG granted about Rs 8,000 crore in recent years prior to 2022 when most lenders, such as Edelweiss, Indiabulls and Piramal, were dawdling on lending to real estate developers in the aftermath of the NBFC liquidity crunch activated by the Infrastructure Leasing & Financial Services’ financial collapse.

Kanak Kapur, partner and managing director, credit and markets, PAG, said, “We have funded several transactions in India in 2022, and cannot comment on individual investment. Each transaction is undertaken based on its strength, not based on the relative value of transactions versus other market participants. It will not be right to compare these with any other participant. We are focused on making high-quality investments and assessing opportunities on an individual basis.”

Last month, it collaborated with Shapoorji Pallonji Real Estate (SPRE), Indiabulls Housing Finance, and Lokhandwala Kataria Construction for reviving the Minerva Towers luxury project in South Mumbai.

It also gave Rs 750 crore to SPRE in 2020.

Last year, it advanced Rs 900 crore to Elan Group for acquisition and growth.

PAG is one of the biggest investors in Asia. As of June 30, 2022, it managed $50 billion in assets for nearly 300 institutional fund investors from around the world. It has mainly three divisions: private equity (PE), credit and markets, and real assets.

“It has done deals that cannot be done through normal banking channels like lending for buying land or taking over a stressed asset,” said an investment banking executive.

Aggressive lending

About half of PAG’s $2.6-billion debt fund it raised in December last year is expected to come to Indian real estate, said the banking executive quoted earlier. The fund is touted to be the biggest debt fund raised in APAC so far.

To this, Kapur said: “We don’t comment on our country allocations by the fund. However, we do believe India’s real estate sector currently presents us with good risk/reward, and we will continue to focus on and invest in this market.”

The executive quoted earlier said PAG has also lowered its rates in recent deals. 

“It used to charge 22-23 per cent before March 2022. Today, it charges 19-20 per cent when other lenders have increased rates. It is not losing deals for higher rates,” he said. 

Said Kapur: “We don’t comment on rates. Each transaction is priced based on individual risk profile and underlying collateral package.”

According to sources, PAG wants to double its investment this year in Indian real estate. 

However, Kapur said it neither has any specific target exposure for India nor investments done to achieve any targets.

“We invest in the sector as long as the risk/reward meets our requirements. We have considerable dry powder in our funds to invest in any Asian market which presents good risk/reward metrics,” he said.

While Indian NBFCs have reduced their exposure to real estate in the past few years, funds, such as PAG, Oaktree, Värde Partners, Inc. and others, have become active in lending to Indian developers, said experts.

“It (PAG) started slow and gathered pace when the right transactions came their way,” said Vishal Srivastava, executive director, Anarock Capital.

Any global fund active in India today operates at an internal rate of return of over 19 per cent since they have to show dollar return to their investors,” said Srivastava.

One of the main reasons for funds like PAG, Oaktree, Värde, and Apollo is the lack of adequate capital deployment by NBFCs, which have still not recovered from the after-effects of the ILFS-triggered crisis in the segment, he added.

Another capital markets head of an international property consultancy firm said the absence of attractive opportunities in global markets is making international investors look at India actively.

“In Europe, China, and the rest of the world, there are few borrowers, and lending rates are in single digits. In India, they get high double-digit returns,” he said.

The head of a Singapore-based investor said PAG does “clean deals” and does not get into slum redevelopment, or inventory-based lending.

“Global investors mostly do English mortgage deals,” he said.

However, PAG cannot do smaller sized deals, he said, adding, “It is a small set-up in India that likes to do a limited number of deals of large sizes. Deals are mostly structured as debt as they can take charge of assets. They are PE deals,” he added.

A SLICE OF REALTY

• Asia-focused investment firm PAG manages $50 billion of assets for investors globally
• Lent about Rs 8,000 crore in recent years before 2022
• The investor loaned Rs 3,000 crore to developers in 2022
• Granted loans to Shapoorji Pallonji Real Estate arm, Elan Group and so on
• Said to double India exposure