The Indian real estate sector, once considered a safe high-return option and now battling a slowdown amid stagnating sales, is facing funding problems with overseas investors.
Private equity companies focussed on real estate are finding it tough to raise funds through foreign high net-worth individuals (HNIs) and institutions alike as India-focussed real estate funds falter on returns.
Industry experts say most PE firms, both domestic and international ones, have been unable to close real estate funds if they are raising it from outside India. "Most private equity firms are witnessing offshore problems while raising funds as many investors have already burnt their fingers in Indian real estate investments," said Amit Bhagat, chief executive officer, ASK, a real estate-focussed PE company. "Many funds, mostly international ones, are unable to give promised returns and so they cannot go to same investors or HNIs again to invest in their new real estate funds."
Many PE funds had promised more than 20% internal rate of returns (IRRs) to investors during the real estate boom of 2005-2007, but fell flat on their promises. International realty funds, with investments in joint development projects in India, are also finding it difficult to exit. For instance, the PE fund of a major financial services firm that had raised around $2 bn (Rs 10,900 crore) and made around 27 investments across India is now unable to exit a project in Chandigarh. "The PE fund's investment cycle ends in 2012 but they have taken a year's extension Yet, its tough for them to get an exit in this particular Chandigarh project, forget giving returns to investors," said the head of a rival international private equity fund.
In another incident, the PE fund of a major Indian bank that had bought a majority stake in a South Mumbai commercial property in 2007 for Rs. 200 crore is unable to fetch even what they had invested.
"Real estate is passing through a rough patch and the sector is not giving returns it was say two-three years ago," said Sunil Bajaj, an independent real estate consultant. "Add to that the currency appreciation that has happened in the past two years which has eaten whatever little returns PE funds could have shown to foreign investors."