ARKA INDIA REALTY FUND

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About Sepulveda Fund Management

In order to provide the clients with acceptable investment options that will help them build wealth, Sepulveda was founded with the intention of giving them care and attention. Being a member of the Incor Group, Sepulveda has years of expertise creating cutting-edge solutions for the real estate, hotel, and healthcare industries. The group’s founder is recognised as one of India’s leading innovators in the real estate and healthcare industries. With years of combined work experience and in-depth industry understanding, Sepulveda has a staff of skilled investment specialists. The firm is skilled in asset management, financial services, and investments and has developed an unrivalled connection network across all the industries it works in. 

Fund Overview

Sepulveda AIF is a new Initiative by Incor Group in the Alternative Investment space. Sepulveda AIF proposes to launch its first scheme Arka India Realty Fund, to be managed by Sepulveda Fund Management Services Pvt Limited (the ‘Investment Manager’).

  • Scheme Arka India Realty fund is a Category-II Alternative Investment Fund.
  • Arka India Realty fund is a 5-year close ended fund with Target Capital of INR 230 crore and green shoe option of INR 220 Crore.
  • The Fund seeks to invest in Villa Plotting, residential Investment opportunities in 5 Cities/metropolitan areas of India-Hyderabad, Bangalore, Chennai, Mumbai, and Pune.
  • The Fund intends to invest in Early-Stage Residential projects in prominent locations with shorter development cycle, receivable backed by significant collateral with an adequate multi-layer security mechanism in place.

Arka India Realty Fund has

  • A well -defined investment strategy focusing on delivering superior returns to an investor on a risk-adjusted basis.
  • A strong investment team with real estate investment structuring and asset management experience.
  • An investment Committee having local domain knowledge and experience.

Fund Snapshot

Sponsor Incor Infrastructure Private Ltd., Milton Real estate Venture Pvt. Ltd
Manager Sepulveda Fund Management Services Pvt Ltd
Target Fund Size INR 230 Crore plus a green shoe option of INR 220 crore
Minimum Investment INR 1 Crore
Fund Life 5 Years extendable by 1 year
Investment Structure Structured Debt including some mezzanine investments through NCDs and OCDs
Target Return 21% IRR
Hurdle rate 12% p.a
Initial Contribution with Application 10% of commitment amount
Annual Maintenance Fee 2% of Investment Amount
Operational Expenses 0.25% of Investment Amount
Carried Interest 20% above the Hurdle rate

Unique Features

Regular Income and Upside

  • Regular Pay-Outs.
  • Back Ended upside for investors in the form of Premium on NCD

Independent Investment Committee

  • To ensure compliance & adherence to investment objective/ fund strategy and investment process.
  • Guidance of highly experienced industry professionals to facilitate the investment decision-making process.

Significant Sponsor’s Commitment

  • Sponsor will commit 10% of the fund corpus subject to a maximum of INR 45 crore.
  • Significantly higher than the regulatory requirement of a minimum 2.5% of the corpus or INR 5 crore

Investment Team

  • Experienced professionals with expertise in real estate structuring, investment advisory field.
  • Specialized Credit and Risk team to facilitate comprehensive due diligence and perform active post investment monitoring.

Fee Structure and Tenure

  • Fund Tenure of 5 years (extendable by 1 year).
  • Hurdle rate of return 12% p. a (pre-tax) for the calculation of carried interest.
  • An annual management fee will be charged on the invested capital amount.

Security Measures and Investment Caps

Debt Like Security

Adequate security cover against the investment amount through various mechanisms such as charge on the underlying land/ development rights, registered mortgages, promoter and corporate guarantees etc. 

Escrow Account Mechanism

Bank account operated and managed jointly by the developer and the debenture trustee. Hypothecation of project receivables to control timely deposit of receivable

Pledge of Shares

Promoters shares are pledged with the debenture trustee. Pledge of shares to be invoked in case identified events of default get triggered.

Personal and Corporate Guarantee

Personal guarantee of the promoters for the performance of the project. Corporate guarantee of the flagship company of the promoters.

Fund Process

DEAL SOURCING AND EVALUATION

  • Sourcing of Potential deals.
  • Specific measures against deal criteria in-line with investment objective and strategy.
  • Site visit and site evaluation.

STRUCTURING & DOCUMENTATION

  • Payment terms.
  • Lending agreement terms.
  • Amount of disbursal and duration of project. 

CLOSING & FUNDING

  • Security Measures
  • Finalizing and execution of Payments/ Disbursement.

EVALUATION

  • Valuation Report/Feasibility Report.
  • Title/Legal due diligence.
  • Partner Due diligence.
  • Transaction Structuring.
  • Market analysis and Research.

DUE DILIGENCE

  • Complete Due Diligence of Project.
  • Financial & Technical Feasibility.
  • Legal grounds check.
  • Lending Viability and project forecasts.
  • Payment feasibilities.

MONITORING & CONTROL

  • Periodic Valuation and Forecast update.
  • Frequent Technical/Statutory Audit.
  • Disposition and Return Analysis

NEGOTIATION

  • Agree Deal structure.
  • Commercial Negotiations.
  • Terms and Conditions.
  • Commitments.

TERM SHEET

  • Adherence to fund strategy and feasibility of target returns.
  • Structuring the finalized agreement terms.
  • Documentation of deal.

EXIT REPAYMENT SALE, LEASE

  • Asset sale.
  • Record Cashflows.
  • Alternative Funding.

India Real Estate Outlook

Market Cap

The market contribution towards GDP is forecasted to be 13% of India’s GDP by 2025 which will be attained by Industrial activity growth, increase at Income level, and rapid urbanization

Snapshot

  • Despite the Economic activity being constrained, the Inflation rate is still in rise.
  • GDP per capita is forecasted to improve in 2022.
  • As per Chief Economic Advisor, the overall Indian economy is to witness V shape recovery.
  • Despite the pandemic, the Real estate market downturned the apprehension by Commercial and Residential being the breather.

Key Drivers

Robust Demand

Growing Economy

  • Urbanization is creating demand in Tier-2 cities.
  • Growing population, Increase in spending, Ease in lending of home loans.
  • RBI’s repo rate being unrevised.
  • Real estate market estimated to increase CAGR of 19.5% during 2017-28.

Paradigm Shift

  • Supply of finance from the banking system and shadow lenders constrained.
  • Institutionalization of financing and ownership of real estate assets.
  • NBFC’s debacle created an apprehension for Investor’s and Lender’s
  • Government allowing 100% FDI into townships and settlement development projects.

Prospects

  • Current shortage is 20 million units and additionally 25 million required by 2030.
  • In 2021, the second-largest investment share is into the Residential sector.
  • Consumer demand moving for peripheral locations.
  • Due to transparency and returns, Private equity is at an upsurge.
  • Raise in International real estate development is expected to boost growth.

Progressive Regulation

  • Real Estate Regulation and Development Act 2016 (RERA) is a landmark change bringing about consolidation, quality, and transparency
  • Tax deduction up to INR 1.5 lakh on interest on housing loan
Real estate Market Dynamics being 

This will prolong due to market sentiment of investing majorly in Residential asset class as it provides low capital and more tangible benefits which can be rented, sold or Utilized.

  • Property Market Movement
  • Economic Growth and Demographics
  • Regulatory and Policy Environment
  • Infrastructure Development
  • Boost in Business Activity
  • Accessibility
Residential Real Estate

Despite the uncertainties and hurdles, the Residential Real estate still saw momentum and attracted the investment share of 23% for FY22 which is the second-largest share of Investment size due to positive sales volume and millennials interest. This made Residential investment being most preferred asset class for Investment.

  • Residential market has seen a positive turn with new launches being 85% YoY change and sales by 71% YoY.
  • Affordable housing launches took a back seat while luxury, premium and Mid-range housing have inched up.
  • Hyderabad tops in high end budget homes by 31% of all top 7 cities.
  • Average Residential Prices are at an upsurge despite the pandemic hit.

Financing Trends

  • Due diligence and Project viability are critical focusing factors for the access of Funding.
  • Developers are raising funds through Private Equity , Own equity or Debt financing.
  • Residential development has constrained lending of funds and AIFs & SWAMIH are gainers.

Market Trends

  • There is a higher capital appreciation for Land when compared to Built up which attracts a lot of buyers and investors.
  • The southern India has a high demand for Plotted developments in comparison with Residential.

Market Outlook

  • Plotted Developments will remain in demand.
  • Housing demand will be driven by end users and millennials
  • Inflated raw material cost will further increase the Housing Prices.
  • Peripheral and Neighboring locations will attract the buyers and Investors.
  • Work from Home Town will increase the demand in Tier-2 and Tier 3 Cities.
  • Grade- A developer will remain dominated in the market.
  • Private Equity inflows stood at USD 3.3 billion. While the Institutional investment of USD 4.3 billion which is 14% YoY decline due to being in Wait and watch mode.
  • For Construction Financing, Structured debt remains the preferred route.
  • The Future 2022 anticipates a strong comeback for equity investments in the Residential asset class.
  • Development sites and land shared 37% of overall investments.
  • Investment is expected to be towards both Greenfield and Brownfield assets.

The Objective

  • To achieve-Consistent risk-adjusted returns by making strategic investments in secured Non Convertible Debenture(NCDs) of portfolio Entities.
  • To Invest-Primarily in Early stage Construction residential projects in geographies with proven market depth, high pent up demand and in projects with low execution risks.
  • To actively manage risk & provide-Regular income in addition to a back-ended upside to, investor by capturing fully secured growth opportunities across a well-located project of quality developers.

Investment Strategy

  • Investing in 5 metro cities-Hyderabad, Chennai, Bengaluru, Mumbai, and Pune where the residential real estate demand is in upsurge.
  • Investing in the projects which are taken by a developer with a good reputation, profitability of past projects, proven execution of projects and a Healthy financial balance sheet.
  • Balancing the Investment risk with structured debt and the collateral securities along with a proper and stringent funding process.
  • Secured NCDs of portfolio entries with a well-defined existing strategy and targeted periodic payouts on a Quarterly/Half-yearly basis along with a back ended upside to Investors.
  • Proper Due diligence, cash flow management throughout the life cycle of investment with a minimum targeted IRR of 22% – 23%.

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Disclaimer: Investing Involves Risk. This document is for information purposes only and should not be viewed as a legal offering document or solicitation. Offers to invest in this fund are made only by the Discretionary Portfolio Management Services Agreement. Past performance does not guarantee future results and there is no assurance that the managed accounts will necessarily achieve their objectives. We do not guarantee any returns in the hand of investors not we take any sort of accountability for the performance of the scheme. The above-mentioned data is collected from the respected Fund house please verify the same at SEBI website.