Monday, April 21, 2014

Decoding private equity in Real Estate

The Big four large real estate funds (together managing over US$5 bn of India-focused money) and present in India since foreign direct investment was permitted first in 2005, along with an MNC bank (estimated real estate book of around US$3 bn) and an infrastructure finance company (estimated investments in real estate about 15% of the `400 bn book). Around US$4 bn was raised by PEs in the past two years for investments in real estate in India. Key highlights of the discussion were

Investors partly accepted some decisions with their first investments, mainly on (1) appreciating development timelines of larger projects, (2) dependence on government approvals and (3) execution risks and scalability of developers, missed/erred in estimations in the past. But for most investors, better realizations (restricting to metros) have helped garner returns.

The difference between expectations on equity and debt returns should increase going forward (currently only 200-300 bps) with an improving market and better learning for both developers and investors from the earlier investments. We expect equity investments to grow in select developers over the next 12-18 months.

Although real estate growth is visible in tier-2/3 towns as well (along with the metros and tier-1 towns), their scale is much lower. Larger investors are now looking to invest only in the top 3-6 markets of India, unlike in the 33 cities invested by the PEs since 2005-06.

No comments: