First it was speculators and investors who rode the three-year real estate boom in India. Householders and companies followed, buying homes and commercial spaces. And now, lured by the massive opportunity and high returns, private equity (PE) is foraying into Indian real estate in a big way. While 2006 saw private equity investments worth $500 million (Rs 2,080 crore), the first six months of 2007 have already seen deals worth about $755 million (Rs 3,145 crore) announced.
Almost Rs 570 crore worth of deals were signed the week before last alone. Indiareit Fund announced an investment of Rs 250 crore in Paranjape Schemes Ltd's 138-acre township in Pune. Trinity Capital Plc, an AIM-listed fund, announced it would invest Rs 320 crore in Luxor Cyber City while a special purpose vehicle (SPV) was set up by Trinity and the Luxor-Uppal combine to develop a special economic zone (SEZ) near Gurgaon. Earlier, Singapore-based Ascendas launched a new India-dedicated fund, Ascendas India Development Trust (AIDT), with a corpus of over Rs 1,300 crore.
According to experts, this is only the tip of the real estate foreign direct investment (FDI) iceberg. A recent Trammell Crow Meghraj (TCM) report suggests that $15 billion (Rs 60,000 crore) may be invested over the next three years. Another study – by Jones Lang Lasalle – had an even more bullish estimate of $10 billion (Rs 41,650 crore) for the next 12-18 months. And one of the two favoured vehicles is private equity, the other being joint ventures.
What's up?
Says Ashish Kalra, managing director of Trikona Capital, the asset manager of Trinity Capital: “India is one of the two fastest growing economies in the world (the other being China). And then there is the sheer scale of opportunities.” Elaborating on the demand aspect, Indiareit Fund chief executive officer (CEO) and managing director Ramesh Jogani said: “Around 17 million housing units, 200 million sq ft of corporate office space and another 200 million sq ft of information technology (IT)-IT enabled Services (ITeS) grade office space are required.”
A recent Knight Frank report suggested an immediate need for 10,000 star-category hotel rooms in India's top 10 cities. SEZs and integrated townships have emerged as other major opportunity areas. Move from the macro-factors to individual deals, and the India story gets juicier. Most PE funds expect an internal rate of return (IRR) of between 25 and 30 per cent on their investments. However, while the scale of opportunities is immense and rewards are really high, funds will also have to cope with several risks. A recent TCM survey of real estate funds in India listed the following key risks:-
• Unrealistic valuations
• Regulatory hurdles
• Lack of clarity in land titles
• Lack of developer credibility and poor track record
• Frequent changes in government policies
• Lack of proper infrastructure
Elaborating on the valuation risk, Jogani said: “You could end up paying too much for the land. You could over-estimate the price that your project will command, or underestimate the construction cost.” You could also assume a shorter gestation period, he pointed out. “In India, it takes one and a half years to get the necessary clearances. Thereafter, provided there is demand, it takes five-six years to complete and sell a 100-acre residential project.”
To ensure success, PE funds will have to invest in the right locations. Observes Kalra: “Though the entry barriers are high, we have chosen to invest in Mumbai and Delhi-National Capital Region (NCR). Significantly, these are the only markets where demand exceeds supply. Markets like Pune, Bangalore, Chennai and Hyderabad don't have high entry barriers, but all of them are headed for over-supply.” The biggest obstacle to investing in Indian real estate, according to fund managers, is the lack of an institutional framework, and hence professionalism. “The sector is still viewed through the speculative lens, just as stock markets were a few years ago. Now, at long last, stocks are treated as a respectable asset class. The same needs to happen in case of real estate,” Kalra pointed out.
Finally, outmoded legislations like the Urban Land Ceiling Act and the Rent Control Act, and poor urban infrastructure, are other issues that fund managers will have to be ready to contend with.
Source : Indian Express