PE Funds Shy away from Real Estate Sector

An apparent slowdown in the real estate sector is forcing PE (private equity) funds to rein in their exposure to the sector, with nearly 30 per cent of the deals now stuck over valuations.
PE funds and analysts have become far more cautious in evaluating real estate investments in India. One of the analysts said that some of the funds are tightening norms for valuations after the slowdown and at least 30 per cent of the deals are taking a much longer time to go through because of valuation issues.
Residential projects Mr Ritesh Vora, who is a director (investments) for PE fund Saffron Asset Advisers told Business Line that as the residential projects are in a correction mode, PE funds are becoming more selective. “The evaluations are more rigorous than they were a year ago. We are being more selective than before,” Mr Vohra said.
But the situation was not so tough for real estate companies earlier. With the stock market on a downslide, real estate companies deferred their IPO plans and turned to PE funds to raise money. According to ICICI Securities, during the last two years, around 60 funds raised $30 billion in assets to invest in Indian real estate.
“The returns have been as high as between 25-30 per cent on an annualised basis, which kept PE funds to continue investing in the sector,” Mr Vohra said. In developed countries, returns for similar investments are between a mere 3 and 4 per cent.
Marginal slowdown The real estate services company Cushman & Wakefield’s Joint Managing Director, Mr Anurag Mathur, pointed out that some of the PE funds, particularly foreign funds, are taking a more cautious approach. “Funds are now more selective and wary of the delivery timelines, costs, quality as well as performance of projects,” Mr Mathur said. He said marginal slowdown in the Indian economy, distressing conditions at home (for foreign players) and the dampening of investor confidence because of mortgage crisis in North America and Europe were some of the reasons for the PE funds to become cautious.
Mr Om Chaudhry, Chief Executive Officer of another PE fund FIRE Capital Fund said because of the slowdown faced by the sector, the developers were witnessing more realistic valuations of their projects. “As a result, PE funds are getting wider choices at attractive valuations than was the case earlier,” Mr Chaudhry said. But Mr Vohra of Saffron Asset Advisers points out once the stock market returns to normal, “real estate companies might return to the market.”