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PE flows to realty mart may start again

Private equity (PE) funds may revive their interest in the real estate sector this year, after a lull of six to nine months, as valuations of properties have dropped by a third, making them attractive for investors, say realty funds and investment advisors to these funds.

Most of the funds have not signed any deals in the past few months as realty prices fell sharply and economic slowdown deepened across the world, which slowed the flow of funds significantly.

“The amount of money available today is one-tenth of what it used to be. But India-specific funds, which have already raised money, will deploy more in the current quarter than they have earmarked in the last quarter,” said Subhash Bedi, partner of Red Fort Capital, a India-focussed realty fund that has invested nearly Rs 1,500 crore in the property market so far.

Figures in $ mn 2007 2008
Total PE flows 15,900 11,500
Average Deal Size 55 39
PE in property 8,700 3,400

Red Fort plans to deploy Rs 150 crore in the current quarter and is in talks with a Mumbai developer. But Bedi says finance is a big issue now as most of the projects have been delayed or are yet to take off.

“The most important question that we are asking developers is that after our funding, do they have enough money to complete the project? The developer’s execution capability is the most important factor today as seven out of 10 projects will be on paper in the next four years,” Bedi said.

Ajay Piramal-promoted real estate fund Indiareit plans to deploy Rs 300 crore this year for housing projects. After investing Rs 1,400 crore between 2005 and 2007, the fund did not deploy any funds in 2008. “Valuations were very high in 2008,” said Ramesh Jogani, managing director of Indiareit Fund Advisors.

Due to weak demand, home prices and office rentals have fallen 10-30 per cent from their peak last year and analysts expect a similar fall this year as bookings are being deferred.

PE flows into real estate have fallen 61 per cent in 2008 as compared to 2007. In 2008, PE funds have invested $3.4 billion (nearly Rs 14,500 crore) in the domestic real estate as against $8.7 billion (Rs 38,500 crore) in 2007.

Despite the fall in property prices and fund inflows, analysts say the Indian property market will continue to receive funds as both domestic and offshore property funds still have nearly $6-7 billion (Rs 33,600 crore) of investible funds with them.

“Investible funds are available. It is a good time for funds with a four to five-year horizon to invest in, for those projects which are stuck mid-way due to lack of funds or companies that have excessive land bank,” said Jai Mavani, executive director of KPMG.

However, in the backdrop of current market situation, funds are still maintaining their cautious approach while investing their money. “We have enough investment period left with us and we have not taken the current market situation lightly,’’ said Naresh Nadkarni, chief investment advisor of HDFC Property Fund, which has invested Rs 2,000 crore so far in the property market.

Source: Business Standard

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