PE investments in realty highest since 2009

Property buyers are shying away from the market and builders are stuck with a large inventory of unsold property. This usual realty gloom-and-doom story now has a new twist.

Private equity investors seem to see an opportunity in real-estate, and in the first quarter of 2014 bet ₹2,800 crore on property investments, close to 2.5 times the amount they invested in the same period last year, according to a report by real estate advisory firm Cushman & Wakefield.

The total private equity funding is the highest quarterly investment since the second quarter of 2009.

Bangalore received the lion’s share, nearly 70 per cent. Notable deals include the ₹1,150-crore investment by Blackstone, Standard Chartered and Embassy India in Bangalore’s Vrindavan Tech Village, and the ₹250-crore outlay by Peninsula Brookfield in Mantri Developers.

What does this mean for property buyers?

The infusion of funds is likely to hasten long-delayed projects and help deliver homes to buyers who have been waiting for possession. Buyers, especially those in the National Capital Region who booked their homes way back in 2009, are yet to get possession, as builders have been starved for funds.

“Builders are under tremendous pressure to complete projects and are scouting for funds to finish projects launched three-four years ago,” says Om Chaudhry, Founder and CEO, FIRE Capital, a real estate private equity fund.

The bulk of private equity funds finance projects in their early stages, before other lenders come in; these are structured to give returns of 19-24 per cent. During the downturn, builders used the money advanced by home-buyers to buy land and start new projects. Now, they are facing the heat from irate buyers and are realising that they cannot sell new projects without delivering the earlier ones. While the ‘pain’ in the balance-sheet may take one or two years to recede, sentiment could revive after the elections, says Amit Bhagat, MD and CEO of ASK Property Investment Advisors, a real estate private equity fund.

He is optimistic that job creation will help revive real estate in the metros as well as tier-II and III markets. Launches are likely to happen in the mid-income home segment, in the price range of ₹30-60 lakh, feel market observers.

Rising private equity interest in realty may be good news for harried home-buyers in another way too. The higher level of due diligence by PE players may offer home-buyers a safety net. When private equity funds take a stake, they try to ensure that projects are completed on time.

Interestingly, the commercial segment, which was going through a rough patch, received over half the total private equity investment. The attractive prices and the expectations of stable long-term rent yields may be the lure, according to Sanjay Dutt, Executive MD, South Asia, Cushman & Wakefield.

Investor interest in the office sector has been rising, with investments doubling to ₹1,435 crore from a year ago. The retail segment received ₹300 crore, nearly as much as in 2013.

Market watchers are also hoping that Real Estate Investment Trusts will become a reality soon, and that they will help private equity funds exit commercial property investments.