India’s real estate sector may see only as much as $1.2 billion (Rs4,920 crore) in private-equity deals by the end of this year, as investors opt to spread their investment over several years, mirroring the duration of the projects, and belying expectation that billions of private capital will be used up this year alone.
That’s barely 20% of the estimated $6 billion queuing up to invest in the real estate market during the current year, with more than a dozen private equity firms scouting for investment opportunities.
“We expect very little to be deployed in the next six months as equity deployment is done over multiple years,” said Abhishek Kiran Gupta, senior manager, research, Jones Lang LaSalle, a real estate advisory. For instance, in a deal involving Dubai’s Nakheel Group and India’s DLF Ltd, the $10 billion equity investment will likely be spread over eight years, Gupta said.
Local and international private equity firms are attracted to the Indian real estate market because of the high returns. The expected returns in greenfield projects—commercial and residential—are about 20-25%, against 15-18% in the other Asian markets.
Much of the private equity investment is expected in the tier-I cities. Despite entry barriers and low landbank availability, about 94% of capital investment in the sector is being deployed in the tier-I cities of Delhi, Mumbai and Bangalore, a report from Jones Lang LaSalle said.
“This is natural considering that tier-I cities have good infrastructure and comparatively lower risk,” Gupta said. But going forward, tier-II and tier-III cities such as Chennai, Pune, Kolkata and Hyderabad will emerge as new investment destinations.
Earlier, private equity firms were not comfortable with investing in tier-II cities. “But now, with developers such as DLF expanding in tier-II cities, firms are also comfortable about investing in these cities,” Gupta said.
Also, most capital investments are being deployed in the residential sector and in mixed-used projects. Morgan Stanley’s recent $150 million deal with Oberoi Constructions in Mumbai was for a mixed-use project and DLF’s deal with Nakheel was for a residential project.
Since the Reserve Bank of India does not permit developers to utilize capital raised from banks for purchasing land parcels, capital raised through private placements, foreign investments and funds are being used for such transactions, the report said.
The share of real estate in the total foreign direct investment in India is also expected to reach 26% in 2007-08, compared with 16% last year.
For the most part of the 1990s, overseas inflow was at $2–3 billion a year. In 2004-05, it was $5.6 billion and in 2005-06, it touched a high of $7.2 billion, the report said.
Both listed and unlisted real-estate firms will continue to drive overseas investments in India. Foreign investors are attracted to the Indian real-estate market because of the strong commercial property yields across metros, and high capital and rental value appreciation, the report added.