The Rising of Real Estate Funds in India

The dream began in 2005, when construction and development of real estate was opened up to foreign investors. Nearly 130 global firms rushed in to invest in the India growth story.  Liberalization triggered the advent of furious fund-raising activity as fund managers neatly packaged and sold the Indian real estate story many times over.

Today not more than 15 of the global funds  are standing, while the remaining have shut shop by selling their equity to domestic PE funds or through share buybacks to the developer, that too  at losses. “The global funds entered at a high point but exited at a lowpoint with zero or low returns. PEs could either choose to salvage their capital and exit or stay married to the project and wait for the tide to turn in due course,” says Anirudh Wahal, director at property consulting firm DTZ.

India-focused private equity funds raised around $50 billion, primarily during 2005 and 2007, of which $15 billion alone was through real estate funds. Four years later, the firms have not even raised a sixth of that amount as investors, globally, are wary of the India shining story.PE  deals have dipped 15 percent this quarter. Data provided by Venture Intelligence reveals that in 2011 there were 87 real estate investment deals while in 2012, it stands at merely 37.

In one of the largest deals in 2012, MSREI invested $90 million in a Mumbai project of Sheth Developers. In another large dea, Xander Group invested about $40 million in a Chennai software park. But such deals have been few as capital is scarce and fund managers are cautious. And why shouldn’t they be?

 “Too much capital in risky and speculative assets, plus lack of appropriate data and proper regulation resulted in many hedge funds and global funds shutting shop,” says Kotak’s Hari. He argues that mispricing, missallocation and misalignment were the three biggest reasons why realty-focussed PE funds failed to deliver returns.

Secondly, the biggest change in strategy has been the move to project-based funding rather than funds buying stake in unlisted developers only to cash out when these firms hit the markets.  Attempts by Raheja Universal and Lodha Developers to go public were upset by poor stock market response, making PE funds unsure of exit opportunities.  Founders of companies, who are eager to accept private equity funding, either decide that they don’t want to go public, or that they want to reinvest their money and delay the private equity investor’s exit,” Hari explained to Firstpost.

Today, the biggest lesson that private equity fund managers have learnt is to tread cautiously and only invest in residential projects in city centres built by reputable mid-sized developers in top metros where key approvals are already in place. This is because as an asset class, the residential sector promises better return on investment.  Residential projects will always be in demand, whether it is investors or genuine buyers. The same does not hold true for commercial realty, as evident from the 30-40 percent fall in retail rentals from peaks in 2008. “Against the drop in lease rentals have property prices fallen in Mumbai, Delhi or Bangalore? asks Rohokale.

Also, real estate is local, and so is investment. Pan-India expansion plans of developers like DLF, Unitech and Indiabull Real Estate were undermined by highly leveraged balance sheets, high borrowing costs and slower execution. “We would rather pump in money into regional developers rather than getting an established player like DLF or Godrej to develop a property in Ahmedabad, where he has no expertise,” says Rahokale of Ask Properties.

Ask Properties has invested Rs 100 crore in a housing project of Shriram Properties at Bangalore and is looking to invest more funds in NCR and Mumbai markets. “The key to success is investing in core residential areas within city and suburban limits and partnering with prudently managed developers. In Mumbai Vashi and Thane are profitable, but Dombivili is not,” says Rahokale. He, however, cautioned that unlike in the past no fund manager would bet on property without ensuring that the investment is protected through a principal and return.

Source :Firstpost.com