Mumbai: Investment banks, audit firms and stockbrokers have rushed to set up real-estate advisory companies over the past year in an effort to target a piece of a $15 billion market —that’s the quantum of investment people are hoping to see in real estate over the next few years.
The list of companies targeting this market include investment banks such as DSP Merrill Lynch and Goldman Sachs, audit firms such as Ernst & Young and KPMG, and stock broking firms such as Anand Rathi and J M Financial. The newcomers are up against firms such as Trammel Crow Meghraj Property Consultants, Cushman & Wakefield, Knight Frank, Colliers International and a few others that specialise in the business.
“The market is wide,” said Shobhit Agarwal, president of capital markets & investment sales at Trammell Crow Meghraj Property Consultants Pvt. Ltd. “There is enough for everyone at the moment.”
Although the Indian real-estate market started expanding in 2002, its potential exploded after regulators allowed foreign direct investment in the sector in 2005, according to a recent report from Trammell Crow Meghraj.
The report said that there is potentially $15 billion (Rs66,000 crore) in funds targeting real-estate investments that have already entered the market or are waiting to. It also said there were anywhere between 100 and 120 India-specific real-estate funds in various stages of operation.
Advisors said that their fee is about 2% of a transaction on average and ranges from 0.5% to 4%, depending on the size of the deal. The real-estate sector needs intermediaries, advisors said, because developers need assistance preparing their numbers and presentations than clients in other sectors. Balaji Rao, managing director of Starwood Capital Group India Advisors Pvt. Ltd, said developers do not know whom to approach.
Over the past six months, several of the deals between investors and real-estate firms have closed, Amit Thawani, associate director of corporate finance at KPMG India Private Limited, said: “Deal sizes will increase, because investor appetite is improving.”
He said more developers would look for private equity funding since their cost of borrowing has increased.
Thawani added that many were disappointed with their performance in the London Stock Exchange’s AIM exchange. Deals would now happen faster, he said, as developers became more used to the process.
Investors and advisors alike are handicapped by the lack of accurate data. Sourav Goswami, managing director at Walton Street Capital India Private Ltd, who entered the Indian market about a year ago, said in India’s big cities prices can vary drastically even within a few kilometres.
He added that there are no reliable data on specific micromarkets. Goswami claimed that the data in most research reports comparing prices across cities and across neighbourhoods in cities are made more on the basis of the expectations of sellers than deals that had been closed at that price. Both advisors and investors said there would be more reliable valuations as more deals were closed.
Goswami also said he believed there was an opportunity to look for deals that did not involve advisors.
“Investment bankers and advisors have been helpful in educating developers on how we underwrite deals,” said Goswami who closed his first deal in India, valued at $100 million, without an advisor. “For funds with local presence, there is also a focus on non-marketed deals…and we are looking at a large number of relationship deals evolving from mutual comfort and interactions which we would not expect to ever be bid out.”