Private equity deals in real estate may increasingly become scarce in the short term, deepening crisis for cash-starved property firms. PE funds are sitting on a pile of cash but not willing to commit funds as they feel they would get better deals in the near future.
“Given the volatility in the market, PE funds in general are not taking any decision on investments. We will be better placed to decide once the dust settles down on the market,” says the head of a domestic PE fund, which expects to invest a few hundred million dollars in real estate.
The US subprime wave has now engulfed Indian stock market with realty stocks being the biggest loser. BSE Realty Index has slid 81% off its January peak. It shrunk 45% in a month as of Wednesday.
Listed developers had already abandoned the idea of tapping capital market or even private placement at the parent company level since the meltdown began in January. Almost all the PE deals which were struck this year were at project level. PE investments in real estate fell from Rs 7,100 crore in December quarter of 2007 to Rs 6,830 crore in six months ended June. The decline in the coming months could be steeper.
“There is hardly any deal being closed as of now in the real estate space. PE players are just sitting on the sidelines waiting for further correction during Diwali and then in the run up to parliamentary election is when they plan to pick up stake,” says DTZ investment advisory director Ambar Maheshwari.
Meanwhile, global funds which do not have India-specific mandate have already started seeing US as a more attractive market. “Property prices have dropped raising yields in the US. Plus US carries much lower risk compared to any emerging market,” says a global PE fund manager. In addition, there is no pressure to do deals even for India-dedicated global funds, adds Maheshwari. “Raising new fund is quite difficult today. So fund managers will take their own time to make prudent investment decision.”
It’s not that negotiations between developers and PE players have completely disappeared, but closing a deal seems an enormous task. “You can’t tinker with the pace of negotiations. It’s not that the balance of power has shifted towards PE today. But in the given circumstances, both developers and PE players are being cautious,” says Emaar MGF Land managing director Shravan Gupta.
However, most investment advisors agree that balance of power has actually shifted in favour of PE players. Developers desperately need cash to keep going, as sales have dramatically dropped and credit become scarce.
A Mumbai-based private equity fund manager says the gap between the expectations of developers and investor is still quite wide. “We expect to close this gap in the March quarter as developers would be under tremendous pressure to show better earning figures for the financial year,” he says.
Source: Economic Times