“Real estate developers face a double whammy of slowdown in the overall growth and hardening of interest rates, while the perceived risk-reward equation for India is going down,” said S Sriniwasan, CEO, Kotak Real Estate Fund.
Take a pension fund in the US, which has the option to invest in the real estate in India or other markets. As the level of information is better in other markets, investors find it easier to take a call there.
“These are existing assets, so there's no development risk unlike in India. Also, if they are investing at home, there's no currency or political risk compared to here. As they can make a return 18-20 per cent in the US, they are wondering if it is worth going to India for an additional 5 per cent,” said a real estate expert.
Investors feel that the marginal higher return is not commensurate with the higher risk investors have to take here. These are early days yet, but this is reflected in the slowdown in decision-making for investment in India, pointed out experts.
“The term-sheets are getting delayed. Investors are asking a lot of questions, while deals have been called-off,” said an expert. In April, Citi Venture and AIG put off plans to invest Rs 1500 crore in Mumbai-based real estate developer Akruti City.
Experts say PE majors are delaying decision because they are not sure. There's lag effect, but developers are beginning to accept the reality, and offer better terms. This is evident in the financing terms they are accepting these days.
Typically, if a PE major and developer invest in a project in the ratio of 75:25, beyond an internal rate of return 15-16 per cent, the profit-sharing shifts in favour of promoters, in the ratio of 60:40. This hurdle rate has now shifted to 20-22 per cent.
“Real estate is headed for difficult times. The next 12 months could see a lot of turmoil. Inflationary pressures will keep the interest rates high. The deficit financing (oil subsidies) will put a lot of pressure on the economy,” said Sriniwasan.
What this means is that the days of super-natural profits are over, and developers will have to start pricing their end-products at affordable prices. Two, the frenzy for acquiring ‘land bank' will go away and land prices will start correcting.
The land aggregators, who have been buying land for companies going public, are stuck or running out of money. A correction may not be such a bad thing.
Source: Business Standard