Private equity investors are poised to exit roughly $5 billion worth of Indian real estate investments in the next two or three years, a Nomura report said, adding pressure to a sector struggling with liquidity crunch and access to fresh capital infusion.
During the boom years of 2006-2008, India attracted an influx of private equity in property, a big chunk of it structured as debt, and in some cases developers will be forced to buy back the investment from the PE firms, the report said.
“This will increase pressure on developers to generate cash flows through affordable pricing and better execution,” Nomura analyst Aatash Shah wrote.
“The fact that a large section of those investments are actually quasi-debt in nature and the projects in which investments have been made are significantly delayed, is a cause for concern as far as the cash flows of developers are concerned,” the note by the Japanese investment bank said.
Shriram Properties, DLF, Lodha Developers, Phoenix Mills and Unitech are the top recipients of private equity in the industry, it said. Top PE investors are Kotak Realty Fund, Red Fort Capital, Citigroup, Sun-Apollo Ventures and Bank of America-Merrill Lynch, it said.
The property industry has had a harder time attracting bank financing following a spate of scandals over the past year and worries about business practices in the thinly regulated sector.
Rising lending rates and volatile equity markets have also clouded the fund-raising outlook for developers, many of which have put their IPO plans on hold.
“Availability of capital will continue to be constrained,” said V Hari Krishna, director of the $750 million Kotak Realty Fund, an arm of Kotak Mahindra Bank, which in March sold a property to Tata Realty Fund for $117 million.
“This will improve deal prospects for PE investors, even though top line of the underlying projects may also be negatively impacted owing to high interest rates and thereby pressure on home buyers,” he said.
Private equity funds have invested $10.2 billion in the industry, both in projects and companies, since March 2006, of which $8.2 billion was invested in 2006-2008, the report said.
With investments maturing, pressure is mounting on fund managers to exit holdings as the Indian property sector has not convincingly shown profitable exits, said a fund manager at a U.S. bank, which has exposure to India’s property sector.
“Of course, there is a pressure. The fund flow may come down unless we see good exits. But, we still think India is a good market and will continue to have a meaningful PE play with quality assets and investments,” said the fund manager, who declined to be identified.
