Mumbai: US-based realty fund manager Blumberg Capital Partners plans to invest $100 million (Rs456 crore) in residential and commercial projects in smaller Indian cities, but fears that corruption and some non-standard practices prevalent in the Indian realty sector may deter investors.

New challenges: Blumberg Capital’s chairman and chief executive officer Philip Blumberg expects to start investing within three years. Ashesh Shah/Mint

“We will look to invest in commercial space and will be a passive investor in residential projects," said Philip F. Blumberg, chairman and chief executive.

Passive investors only expect returns on their money, instead of managing the properties they invest in.

Blumberg is in India to talk to “partners to provide funds for redevelopment projects...and buy and manage" property, including banks.

Redevelopment projects involve buying land from slum dwellers and creating affordable homes on a part of it for them, while using the rest commercially.

Blumberg has no time frame in mind, but said he expected to start investing within three years. However, he is wary of “outside influences", he said, referring to corruption, as well as some practices that are peculiar to the Indian realty market.

An example is the practice of having different investors manage different floors of a multi-storeyed building project. Blumberg said the norm in the US was to let one investor own the whole building, while others remained passive investors.

The fund manager’s India plans are part of a larger move to diversify outside the US market. It is raising $1 billion from high net-worth individuals and institutions to start a real estate fund that will invest up to 30% in non-US assets, particularly in the Persian Gulf and India.

The fund has a maturity of eight years. Blumberg said he expects to close the first round of funding at $100 million in a few weeks. But commercial real estate business is stagnant in India and investors are reluctant to step in, say property advisors.

“Interest for global investors to invest in (Indian) real estate is very less," said Amit Goenka, national director, capital transactions at property advisory Knight Frank (India) Pvt. Ltd. “There is a huge oversupply in the commercial real estate space, but no risk appetite."

Though some foreign investors, such as Canada-based fund SITQ, have evinced interest, investment in commercial space has generally been declining, even from local investors.

Private equity (PE) investment in real estate declined from 94 deals worth $6.64 billion in 2008 to 29 deals worth $868 million a year later. In the first quarter of 2010, there were 10 investments worth $201 million, according to Venture Intelligence, a research firm that tracks PE funds,

“Many developers are offering properties at distressed valuations to recover the land cost at least. In commercial real estate, there are no buyers and low margins. Also finding exits is a challenge," said Goenka.

Redevelopment in particular is a risky class of assets. Developers need at least 3-4 acres before they can get started. The price of residential land is also spiralling, says a report from Swiss bank Credit Suisse. “Prices in major centres, such as Mumbai, Gurgaon, Bangalore and Kolkata, are back to pre-crisis levels while prices in cities such as Noida, Chennai and Hyderabad are still 20-35% below their 2008 peaks," Anand Agarwal and Abhishek Bansal wrote in the 13 May report.

Blumberg, who delivered a 17% annual return for a fund that started in 1992, admits to the challenge. “The land pricing is very high, so most of the funds are invested at that stage and hence the returns are delayed," he said. “Therefore, tier II cities are where the opportunities lie."