Anuj Puri
With the return of confidence in the sector, Indian real estate players are now once again looking at private equity funding. That said, the industry still depends heavily on bank debt, NBFC funding and end-user advances. This is because bank debt is a cheaper option, and also because it offers flexible tenures. Moreover, it is easily available domestically. NBFC funding is also available at cheaper rates and can be repaid early. This makes it more flexible. Finally, end-user advances represent interest-free finance.
Private equity investors, on their part, are definitely interested in investing in India’s real estate sector. They expect returns between 20-25%, post tax. These expectations are almost the same as what they were before the downturn – however, the structure has changed, as private equity funds are now focusing more on capital protection. In other words, they seek lower risk even if that means slightly lower returns.
Currently, the proportion is heavily skewed towards residential. This can be attributed to the fact that the residential sector is correctly seen as a self-liquidating asset class, while commercial and retail real estate have exit-related concerns due to unavailability of REIT/REMF vehicles in India.
Some new private equity funds have recently entered the Indian real estate arena – among them Aditya Birla and ASK. All in all, I can say with confidence that private equity investments into India are increasing. In the first half of 2010 alone, India Inc saw over 150 major deals – and, significantly, a little over 10% of these were in relation to the real estate sector.
Into which cities are these funds being channeled? It first seemed as though a majority of the PE funds in the system were being directed into the primary cities – namely Mumbai and Delhi NCR. However, it emerges that not a few private equity funds have also chosen to invest into large residential projects in Tier 2 cities, since they perceive that the demand for residential spaces in those cities is heavy enough to justify quick absorption.
After all, what matters most when the chips are down is returns on investment…
The author is the Chairman & Country Head at Jones Lang LaSalle, India
