Firms which capitalise on this opportunity will succeed

Real estate private equity (PE) players have become a part of growth story since their entry into India in 2006. Their investment went up to $7.6 billion within a year from $1.2 billion. Subsequently, however, there has been a fall in their investment, primarily attributed to the global financial crisis. In the current calendar year so far, total investment from PEs was around $741 million.


Asset-wise, large investments (commercial, mixed use, residential, SEZ and township) were made during 2007 and 2008. Each of these two years saw 57 investment deals.

During 2010, the number of deals dropped to 27 and further to seven in 2011. The investment into the Indian real estate was primarily due to the futuristic view adopted by the PEs and developers during the peak period. Investors from the U.S. and the U.K. lined up to India to invest in the real estate sector as they felt that India was a stable country. But subsequently global economic crisis has resulted in slowdown in investments.

“One cannot deny that private equity firms have really helped the Indian real estate developers”, says Sriram Srinivasan, Associate Director, Head, Capital Market (Chennai), Jones Lang LaSalle (JLL). With FDI (foreign direct investment) in place, small developers, too, are now able to take up large projects. Developers either enter into agreement with PEs as joint venture partners or let PEs take up stake in their land bank by creating a special purpose vehicle for a particular project.

According to Om Chaudhry, Chief Executive Officer, FIRE Capital Fund Private Limited, private equity firms are bound to stay in India. Urban housing in India is a trillion dollar opportunity over 2011 to 2026. It, in fact, has the strength to push the GDP (gross domestic product) growth by another 2 percentage points and seek the much wanted 10 per cent rate of growth. Players who can capitalise on this opportunity with continuous adherence to quality and customer focus shall command definitive success, feels Mr. Chaudhry.

Various types of assets

According to a JLL report, about $15.8 billion has been invested from 2006 till date on various types of assets. Of which, $2.7 billion went to residential projects and $2.4 billion to township projects. A sum of $2.3 billion went to commercial projects, $2.1 billion to mixed use and $961.4 million to SEZs. During the current year, PEs invested $320 million in commercial, $65 million in mixed use, $44 million in residential, $190 million in SEZs and $122 million in township projects.

During 2011, Hyderabad attracted the highest investment of $190 million followed by Chennai $143 million, NCR (national capital region) $66 million and Bangalore $22 million, says a JLL report.

Mr. Chaudhry says that private equity funds, especially in real estate, are long-term funds. It will work with the investors during their commitment period. Further, the way PE funds function is based on the commitments from the limited partners. In a pressing environment, the limited partners, too, feel the need to conserve cash and not take higher risk bets. Returns of PE funds are based on the sector they operate in. They expect returns as per the risk of the bets that they are taking. Globally, return on investment for private equity firms averages around 16 per cent. Accounting for risk associated with emerging markets like India, international investors seek 20 per cent return. Private equity investment in real estate in India is largely dominated by project-level investment, as the consideration set for entry level investment is too small. Weak governance, financial mismanagement, lack of transparency, execution capability of developers, market absorption, over-valuation of the project and malpractices are way too common in real estate sector for private equity players to come in and feel comfortable.

Mr. Chaudhry says that approval in real estate projects is too cumbersome. Second, shortage of skilled labour poses significant challenge in the delivery of high quality projects. Government intervention and protectionism with the introduction of minimum capitalisation norms and size of project requirement have all made many smaller players who are in dire need of professional intervention out of bounds.

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