Many new real estate projects, especially those in which private equity (PE) firms are investing, could see a substantial price correction across India as PE players have begun to dictate the prices to be charged, apartment sizes and project schedules.
"PE players dictate terms like what prices to be charged, whether the project should be affordable or luxury and exact time of its completion," said Sunil Rohokale, executive director, ASK Investment, which has invested Rs. 850 crore till date and recently raised Rs. 480 crore. "The increased power of PE players is due to the unavailability of funds from any other source."
As banks tread realty sector with caution and the capital market appears too volatile for raising funds, special purpose vehicles (SPVs) with private equity appears to be the only alternative. "We are the last resort for the real estate developer as our return expectation is high," said Ved Prakash Arya, managing director, Milestone PE.
But why are PE players interested in bringing down the property prices? Many of them fear a slump in sales at such steep prices, especially in Mumbai and the National Capital Region (NCR). "If sales don't happen (then) we are stuck with our investment so we decide the price. We also decide whether the project should have one-bedroom or two-bedroom apartments," said Rohokale.
Avinash Gupta, head, financial advisory, Deloitte India "Funds are now going for structured deals as it binds the developer and the funds get more power in case they do not yield promised returns."
In a recent transaction in North Mumbai, a developer who had made 50% payment for a plot a year ago, and could not pay the rest, was forced to approach a PE player for funds.
In this project, the PE player, who requested not to be named, has picked up a stake on the condition that prices would be lowered. "The developer wanted around Rs. 12,000 per sq ft, but sales would only happen around Rs. 8,000," said the PE player who is close to finalising the deal. "He was reluctant but if he doesn't agree to the selling price we tell him, he will end up losing the amount he has paid (for the land)."
Many developers delay projects due to liquidity issues, hence PE players are fixing project tenures also. "We expect a return of 20% to 24% per annum and only invest in projects that would be launched in three to six months," said Arya.
Milestone was reported to have invested Rs. 100 crore in a project of Ackruti City, a Mumbai-based developer. ASK has invested in six projects within last one year in projects in NCR, Chennai and Pune.
Industry players expect PE investments to rise. "Just a year back one could not find a single deal within Rs. 150 crore in Mumbai, but now things are different, due to attractive valuations," said Rohokale.