PE Money coming in Full flow into Indian Realty

May 27, 2008	(1 votes, average: 1 out of 5)  Loading ...
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The private equity (PE) graph in India’s real estate sector is growing as high as its skyscrapers. The first five months of 2008 has PE commitments in Indian real estate companies surpassing the total PE investments committed in the whole of 2007—that is $3 billion.

Experts say PE funding in the second half of the year will be even more. This is a good time for PEs to invest as there is a liquidity crunch and valuations of many real estate players are down. PEs also expect a further lowering of valuations, somewhere in the tune of another 20%. Even as private equity money comes into the market, there are concerns among investors about the execution capabilities of many of developers.

The months since January haven’t been too conducive for the real estate market in India. For one, real estate stocks plummeted as the stock market crashed January onward. “Many real estate players have been feeling the liquidity crunch and this is where private equity funds have an opportunity to cash in. This is a good time to close deals and scout for more at lower valuations,” says real estate expert Ankur Srivastava.

A lot of the deals that were closed this year may have started negotiations sometime last year, said Infinite India Investment Management director Jagdeep Pahwa. They closed a $150 million deal with Maytas Properties in February 2008 but the negotiations were on since the third quarter of last year. “Earlier, people could tap debt as well as the public market, both of which have dried up today. PE is today more available versus the other two. Deals that are happening today have a higher component of preferred returns which offer a form of downside protection to the investor,” he explains.

What is interesting to note is that most PE funds are expecting a further dip in valuations, even at the SPV level. “A number of developers are reluctant to accept that the valuations are down even at the SPV level. PE’s are seeing deals at much lower valuations even at project level,” says Srivastava. Developers though deny that SPV level valuations have been hit at all. “The overall valuations of the company might be down 50% over the last 5-6 months but SPV level valuations has not been hit. In fact it has increased,” said Omaxe MD Rohtas Goel.

Kotak Realty Funds ED S Sriniwasan feels that though there has been some correction, valuations haven’t corrected enough. “Expectations of developers haven’t gone down yet though some of the more practical guys have recognized that circumstances have changed today,” he adds.

Many funds today are getting more choices. “With the real estate sector witnessing rationalization, developers are more realistic on valuations of their projects. FIRE Capital Fund is today getting wider choices at attractive valuations and with a range of developers who are looking at a value add in terms of development expertise in addition to capital infusion,” said FIRE Capital Fund CEO Om Chaudhry.

Parsvnath Developers COO Dr BP Dhaka feels the slowdown in real estate can be seen as the maturity in the sector. “Any sector that is transparent and professional is attractive to PEs,” he explains. It is then obvious why PE investments in the first 5 months have matched total investments of the previous year, said research and consulting firm Four-S Services CEO Satyendra Shukla. What many developers are trying to do today is to replace these by longer-term investors. Sriniwasan has a slightly different view on this. He feels end product prices still have to come down. “The correction will be confirmed only when we see volumes pick up at those corrected prices,” said Dhaka.

News Published Under:   Real Estate India, Banking and Finance, Retail Market in India |

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