Loans for housing will get dearer and interest sensitive sectors like real estate will be hit hard, said Mallinath Madineni of Arthaeon Financial Services.

“We expect banking and real estate stocks to under-perform in the near term,” Madineni added.

Punjab National Bank on Wednesday raised its prime lending rate by 100 basis points or one percentage point to 14 per cent from August 1. Other public and private sector banks are expected to follow suit.

Nahar group chairman Sukhraj Nahar said an increase in the cost of borrowing would in turn raise the cost of a real estate project.

“The cost of borrowing goes up not only for builders but for all ancillary and input industries as well, leading to a higher price tag for the real estate product,” Nahar told IANS in Mumbai.

He said the rate hikes would eventually hurt the balance sheets.

Sunil Malhotra, vice-president (finance) at real estate firm Omaxe Ltd, said the flow of money to the sector would be tighter than before.

“Developers will now have to look towards other sources of funds, which could be on higher rates,” he added.

Agreed an analyst with a leading Mumbai-based brokering firm, who wished to be unnamed. “Developers will now have to look to other sources of funds like foreign direct investments and so on,” he said.

Parsvnath Developers chairman Pradeep Jain said the cost of funds for the company’s upcoming power projects would go up significantly.

“This will in turn be passed on to the buyer,” he said.

Echoing a similar sentiment, Punjab National Bank chairman and managing director KC Chakrabarty said the pressure seems inevitable. “Bankers would pass on the burden to customers.”

A 0.5 per cent increase in home loan rates - which appears most likely - will increase the tenure of a Rs 3 million, 20-year loan by nearly three years.

Real estate demand in major Indian cities has been hit this year as urban middle class buyers, fretting over a five-year high in property prices, have stayed away from investing in property as interest rates climbed rapidly.

“Demand has slackened 10-15 per cent since the beginning of the year,” Sarang Wadhawan, head of HDIL, India’s third largest developer, said last week.

However, a few real estate agents said the rate hike could cause a possible softening of property prices, even in markets such as Mumbai.

“Developers are sitting on unsold stocks of completed apartments. But potential buyers are sitting still in anticipation that prices will come down,” said a real estate agent in Mumbai declining to be named.

SUN-Apollo is a joint venture between Delhi-based Khemka family’s SUN group and US-based private equity fund Apollo Real Estate Advisors. Apollo’s development and investment portfolio is spread across US, UK, Russia and other European countries, besides India. SUN Group, which has interests in oil & gas, mining, real estate, infrastructure, food & beverage and technology, has been active in India, Russia and other emerging markets.

“The SPV will develop a 200-acre township in Jaipur and a 15-acre high-end housing project in Noida. Both projects are likely to be completed in two-and-a-half years,” Amrapali group chairman Anil Sharma said. The Jaipur township will have housing, retail, commercial and IT space. Amrapali group, which has developed six urban residential colonies in the national capital region, is at present executing real estate projects worth Rs 8,000 crore in several cities.

The SUN-Apollo fund infusion is the latest in the series of PE funding in the Indian real estate despite a slowdown. Many PE funds had raised funds when the going was good for the realty sector as well as the financial markets. SUN-Apollo had closed a $630-million fund last year.

Therefore, the PE infusions in Indian realty are mostly the deployment of funds raised earlier. But now with credit crisis gripping the globe, fund raising has considerably slowed. Meanwhile, demand has slowed down and bank credit is largely unavailable to realty firms, forcing them to seek cash from PE players at a not so favourable term. Real estate players are said to be settling for a project valuation of 30-40% less than what they could have got a year ago.

Cash crunch has forced several real estate ty players to focus on executing existing projects, rather than expand into new areas. Some, however, are still exploring new themes. Amrapali group is foraying into hospitality with a 230-room hotel in Greater Noida.

The PE fund, the first from Milestone’s stable, will focus on sectors such as education and infrastructure. “Right now, I am bullish on these two sectors as there is lot of scope for companies to expand and reach a mass base,” said Ved Prakash Arya, managing director, Milestone Capital Advisors.

Its fourth real estate fund — Milestone Domestic Fund Part-II — has raised Rs 430 crore and will close shortly. The fund house is proposing to raise Rs 500 crore from this fund. Despite the rough market weather, the fund house’s track record and investment strategy have helped in getting investor commitments, Arya said.

Realty funds have been finding it difficult to raise funds from high networth individuals (HNIs) and institutions owing to a credit crisis in the US, the impact of which has been felt in India as well.

Rising interest rates and curbs on external commercial borrowings have added to the woes of real estate companies as well as funds. A correction in the real estate sector has further soured the mood of investors like PE funds towards this sector. The company currently manages four real estate funds worth Rs 2400 crore.

The son of famed real estate developer and media personality Donald Trump will raise as much as $1 billion for the privately-held fund, Bloomberg News report. Analysts expect property prices in the subcontinent to drop by about 20%, creating opportunities for the hedge fund.

“The fund will be for acquisitions of real estate in the high end, and across the spectrum,” Trump told Bloomberg. “The marketplace is beginning to understand and appreciate luxury, so there is a great opening for us there, as well as in resorts.”

The Wharton School graduate did not give specifics about how he will raise the money, except to say that an Indian family is among his investors.

LIC Housing Finance is reportedly scouting for a banking partner for raising capital and will soon approach the Securities and Exchange Board of India (Sebi) to set up an asset management company. To invest in listed companies, companies usually register with Sebi.

“This is an opportune time to enter, considering the demand. We will form a separate asset management company to manage this fund,” a senior LIC Housing Finance executive told Business Standard.

Based on the response to the real estate fund, the company will decide on whether it will expand its presence in the venture capital space.

“We are yet to finalise the deal structure, but will definitely be the majority shareholder in the fund. We want to launch the fund in this financial year. But we have to shortlist a banking partner,” the executive added.

Sources said there are at least three major banks in the fray for a tie-up and a memorandum of understanding will be signed soon. While LIC Housing Finance would be the promoter of the real estate venture fund, LIC could also be one of the internal contributors of the fund.

In a recent interview to Business Standard, LIC Managing Director Thomas Mathew said the insurer has no plans to directly enter the private equity or venture capital businesses.

The fund proposed by LIC Housing Finance will be used to finance real estate development and 50-60 projects are likely to be funded over 12-18 months.

A large number banks and finance companies have recently entered the venture capital space and the existing players are expanding their footprints.

According to Grant Thornton, 33 deals were inked in the first six months of the 2008 compared to 29 deals in the January-June 2007.

PE deals, during the month of June, stood at about $247.5 million, almost half the level seen in May 2008 when about $ 478 million of PE money was infused into various projects.

Low valuations

“The valuations are certainly down as the market is in the midst of a slowdown.

“With access to capital market out of question and bank debt getting tighter, we see more and more developers tapping PE sources to bridge the fund gap for projects.

“Although in the short-term PE players may take a cautious stance, over a 12 - month horizon, the number of PE deals is likely to go up,” says Mr Subhash Bedi, Director and Partner, Red Fort Capital.

Red Fort Capital has concluded seven transactions in the first six months of 2008 compared to six deals during entire 2007.

Pumping in Earlier in June, Lehman Brothers Real Estate Partners had announced an investment of Rs 740 crore ($185 million) for 50 per cent stake in the initial phase of a Unitech project, located on the Western Expressway of Mumbai.

During the same month, Axis Bank too invested Rs 250 crore in Lavasa Corporation, a subsidiary of Hindustan Construction Company, in the form of convertible preference shares and convertible debentures.

An industry official pointed out that while investors were still interested in the real estate market, they had adopted a selective approach towards projects.

“With more projects on the negation table now, and given the current market sentiments, PE players will pick and choose. Only those projects which have the required approvals in place would hold their interest,” the officials said.

“This is the first tranche. Another $300 million will be raised by September,” the spokesman said. He declined to name the investors.

The Economic Times newspaper, citing an identified senior Unitech executive, said a Japanese bank and some Europe-based wealthy individuals were the investors in the Unitech International Real Estate Fund.

Property firms have been chasing private equity investors to tide over a cash crunch caused by rising lending rates, high inflation and falling stock markets.

Unitech Ltd last month sold half its stake in the first phase of a commercial real estate project in Mumbai to Lehman Brothers Real Estate Partners for $175 million rupees and said it was looking for private equity investments of about $1 billion for its hotel and other projects.

Speaking at a function in Ghaziabad on Monday, State Bank Chairman-cum-Managing Director O P Bhatt said the bank has decided to raise the interest rate by 0.5 per cent on all loans such as home loans and auto loans which are linked to PLR.

The revision in PLR came after SBI raised its PLR from 12.25 per cent to 12.75 per cent last week following Reserve Bank’s increasing its key short-term lending rate to banks and the mandatory cash deposits that banks need to keep with the apex bank (CRR) by 0.5 per cent each.

Referring to the impact on bank’s profit margins, Bhatt he hoped to maintain the net interest margin at 3 per cent this fiscal.

SBI had earlier announced to hike interest rate on fixed deposit rates by up to 75 basis points effective from June 30.

State Bank of India in which government has about 60 per cent stake is targeting 40 per cent growth in non-interest income in 2008-09, compared to 28 per cent last fiscal.

The bank had lowered its PLR twice in February to 12.25 per cent but decided to raise by 50 basis points last week.

“The net profit of the bank is likely to be affected next quarter though there is not much on first quarter profits ending today,” he said.

He also indicated the bank is expected to set aside at least 10 billion dollars (232.8 million) to provide for depreciation in its treasury portfolio as interest rate rise.