PE inflows in realty space dry up during July-Sept quarter

PE inflows in realty space dry up during July-Sept quarter

New Delhi: Country’s real estate segment has taken a beating in terms of private equity investment in the third quarter of this year as the inflows into the sector was only $669.7 million, a dip of 73.21% from the second quarter of 2008.

“Realty space is already buffeted by rising inflation, input costs and a tight squeeze by the government on fund inflows into the sector in order to discourage speculation," research and financial consulting firm Four-S Services CEO Satyendra Shukla said, adding that fall of global investment banks has come as the latest salvo to hit the sector.

According to preliminary estimates during July-September 2008 period, PE fund flows into the real estate sector stood at $669.7 million, down sharply from $1.66 billion during the January-March 2008 and $2.5 billion during the April-June 2008, Four-S Services said.

“We are seeing signs of fund inflows from private equity players in real estate getting affected," Shukla added.

The various factors that had a negative impact on the PE fund flows include rising capital costs as high as 15-20% increasing input (raw material) costs and tightening fund inflows both domestic as well as global. Accordingly, there has been a sharp hike in the cost of real estate properties, which in turn has dampened demand.

Real estate companies have been increasingly accessing funds from PE players in specific projects by splitting the projects into Special Purpose Vehicles (SPVs), instead of offloading stakes in the mother company.

Four-S Services further said some of the real estate giants like Unitech, DLF Assets, Peninsula Land, Future Group and HDIL are reportedly in trouble after US-based investment bank Lehman Brothers filed for bankruptcy protection. Besides, Lehman is said to have had a total commitment of over $1 billion in the Indian real estate sector.

“Between January and August 2008, investments made in phases in SPVs stood at about $1.8 billion spread across 25 deals, constituting 45% of the overall investments in the sector," the provider of research, financial consulting and business content services said.

In the domestic market, despite the cut in Cash Reserve Ratio, interest rates are not expected to go down in a hurry, especially since the government is keen on keeping inflation under check, market observers said, adding that the short-term outlook for the real estate sector looks grim and only those players who have significant reserves will be able to survive the current downswing.

Earlier, PE investments in the country witnessed an increase of 55% in terms of value to touch $10.4 million during the first six months of this year, driven mainly by significant deals announced in the realty and infrastructure sector.