Foreign institutions queueing up to invest in Indian real estate

Mumbai: Venture capitalists, foreign banks and real-estate fund managers are busy sniffing opportunities in the Indian real-estate sector at a time when prices are softening and the central bank has continuously been tightening lending to the sector.

This hunt for potentially distressed assets may be linked to the valuations at which these bankers have struck deals over the last year, and the desire to bring down the total cost of their acquisitions by buying more when prices are falling. In the past 15 months, the number of private equity deals in the realty sector totalled 42 with an announced value of $1.79 billion (Rs7,697 crore), according to data collated by accountancy firm Grant Thornton India, which tracks cross-border transactions.

International property development firms from West Asia and as far away as the US have announced mega plans for investments in India, running into billions of dollars. Real-estate consultancy firm Cushman & Wakefield estimates that foreign funds and institutions have raised $15 billion for investing in this sector so far.

The recent softening of real-estate prices is not deterring the investors. Instead, it offers an opportunity to enter at lower prices. “Given the tightness in the interest rates and the weakness in initial public offer (IPO) market, this is a good chance for venture capitalists to cut better deals at cheaper valuations,” said Harish H.V., Grant Thornton India’s partner for corporate advisory services. Cushman & Wakefield estimates show that capital values between 2005 and 2006 have risen 30-40% in Delhi’s residential market, while commercial capital values are up by 70-85%. Mumbai’s residential capital values are up 25-35% and the commercial segment has seen an increase of 45-55% in the same period.

Says Sanjay Verma, Cushman & Wakefield’s executive managing director for South Asia: “The upside in this sector may change depending on when you entered the market. One year ago, there wasn’t as much of an upside as there is today (in reference to the softening in prices.)” Verma also points out that institutional investors have a long term perspective and their acquisitions costs will average out, considering that they are buying the India story and not making investment decisions with a three-six month time frame.

Bankers, too, are confident that this time around the cycle is fundamentally strong compared to 1994-97 (when the market crashed after the prices staged a phenomenal rise) and continues to maintain a bullish outlook on the sector. Says Sandeep Kundu, director (real estate), US-based Wachovia Bank: “I don’t see the crack in prices yet, but certainly there is negative energy with mortgage rates on the rise and a slowdown in smaller towns.”

Kundu, who is learnt to have invested over $100 million last year, says that despite the slowdown, his bank plans to put in more proprietary capital in the Indian real-estate sector in 2007 than it invested last year. “Sure, developers may be under pressure and the next one month will be critical as far as price movements are concerned, but we’re here for the long haul. And our investing is more perspective-based rather than just based on market conditions,” he adds.