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Indian Realty Sector: Flush With Funds
Posted by Pradeep Sadanapalli | November 18, 2007 | 311 views
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Loading ...Both Indian, as well as giant MNCs, are raising huge capital overseas for investment in the Indian realty sector, which is still booming despite price corrections since last year, Prabhakar Sinha reports.
Despite real estate having witnessed some price corrections in the last one year, the construction activities are still on the rise. This will lead to an increased supply of realty space in short-to-medium term, keeping the price-rise in the sector under check.The reduction in the profit margin is not likely to affect the developers’ overall profit growth as the size of this business is likely to expand at a rapid clip. For the end users also, this will be a good development.
However, investors should watch out. The return on investment in real estate is not likely to be same, as it used to be in the past. Consultants feel that return on investment at the time of implementation of the project would not be more than 15% per annum.
Heightened activities
The main reason for the increase in construction activities despite correction in the real estate prices is the easy availability of funds in the sector. According to Ernst & Young report, Indian Real Estate: Growth and New Destinations, around $4.36 billion has been raised from the stock market since August 2006 to August 2007. A number of Indian companies and foreign entities have raised funds in the international markets like Alternative Investment Market (AIM) and the London and Singapore listed REIT. Besides this, $3.2 billion foreign funds have come into the country through private equity route.
A number of large companies like DLF Limited (Rs 9,500 crore), Parsvnath Developers (Rs 1,000 crore), Purvankara Projects (Rs 850 crore), Housing Development and Infrastructure Limited (Rs 1,700 crore) and Omaxe (Rs 550 crore), among others, raised substantial amount of funds in the market through initial public offerings. Companies like Ansal API raised around Rs 1,000 crore from private place of its shares.
A number of developers and funds raised large sums of money in the international market like AIM, London.Mumbai-based Hiranandani’s Hirco raised $761 million, Unitech $716 million,Trinity Capital $500 million, Dev Property Development Plc $412 million and Ishaan Real Estate $341 million.
Besides these inflows, a number of private equity funds are also active in the real estate sector to find good opportunities to invest. According to E&Y, it is estimated that nearly twodozen US funds such as Blackstone Group ($1 billion), Goldman Sachs ($1 billion), Citigroup Property Investors ($125 million), Morgan Stanley ($70 million) and GE Commercial Finance Real Estate ($63 million) are raising funds for investment in Indian real estate sector. Other funds like Berggruen Holding ($200 million), Kenmore, Bluestone Quantum Management Pvt Ltd are also set to enter in the Indian market.
The activity is not limited only to international private equity players and financial institutions. Several Indian financial institutions are also in the fray to raise funds to invest in the fast growing sector.The largest housing finance company,HDFC Ltd,has recently raised $800 million from overseas markets to invest in real estate in India.The nine-year fund will be invested in real estate sectors.
Similarly, IL&FS Investment Managers Ltd and Milestone capital Advisors have jointly launched a Rs 1,000-crore fund. Urban Infrastructure Venture Capital has launched an Urban Infrastructure Opportunity Fund with a corpus of $1,250 million to invest in general, as well as SEZ-related projects.
In fact, a large fund manager says the problem is in getting a good project to invest.He said that,earlier,funds used to be invested only in those projects where the potential return was upward of 20%. But, now, as a large number of funds are chasing a few ongoing projects, the potential return from any project has come down to less than 20%. In fact,in all the projects where developers have made arrangements right from land acquisition, to raising money, and finally project implementation, there have been no problems.
Earlier, developers used to raise money by selling the projects at prelaunch stage before securing all the clearances from government authorities, and used to implement the projects. But now, as demand in the prelaunch stage is very lukewarm, they raise funds from private equity players at the launch stage of the project.
However, many of the equity funds, instead of investing at project-level special purpose vehicle formed to implement it, take equity stake in the company directly. According to the E&Y report, Morgan Stanley Real Estate invested in Oberoi Constructions, Singapore-based GIC, George Soros and Morgan Stanley jointly invested $166 million in Anant Raj Industries. Blackstone group acquired 14.5% stake in Nagarjuna Construction.Trinity Capital invested Rs 300 crore in Luxor Cyber City, an SPV formed by Uppal Group and Luxor group. According to the report, Deutsch Bank acquired 5% stake in Emmar-MGF for $1 billion.Recently,US-based Walton Street Capital invested in Shriram Properties.
Next-Tire Growth
Such a capital inflows have given a huge boost to the sector. The construction activities are not limited to big cities like National Capital Region of Delhi, Mumbai, Bangalore, Hyderabad, Chennai and Kolkata alone - growth has also spread at a fast pace to other smaller cities like Jaipur, Chandigarh, Rudrapur, Nagpur, Surat and Kochi.
However, for the systematic expansion of the town, it is very important that the governments should invest in infrastructure like road, rail and electricity. A senior fund manager said that he had invested in a company, which is developing a large projects near a metro city. But, for the success of the project, it is necessary that the area should be connected via good road network to the main city. And only then will the new township have some salutary impact on the real estate prices of the main city. The role of the state government is important in this. The commercial real estate rentals have gone through the roofs in some cities mainly because of inadequate supply of quality space. This is bad for the growth of the country. If India wants to grow at over 8%, it will have to create basic facilities like commercial and residential real estate for the companies, which want to operate in the country.
SOURCES:
Times Of India
Topics: Reports, Real Estate |
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