Cautious private equity (PE) investors, who burnt their fingers in real estate investments made at 2007-08 peak prices, are now investing on the assumption that prices are not going to increase from current levels for the next three years.
In what could be an indication of price trends in the real estate sector as perceived by many PE players, the expected returns, or IRR, are calculated at current prices.
"Earlier it was a common thing that a PE player would enter at a price and would calculate the returns on the expected price the project would fetch at the time of exit. The way things are going, we are not taking any risks and are taking a hypothesis that prices are going to remain the same for the next three years," said Amit Bhagat, CEO, ASK property investment, a PE firm.
Industry experts say many PE players who had invested in projects calculating returns on future prices promised by developers are in a fix.
Most of the exits that have happened in the real estate sector in the last two years were secondary exits.
"PE players have become more cautious with real estate investments, and the number of deals has also declined. PE players are investing only in projects with all approvals in place and with shorter cycles. They expect stable and assured returns," said Avinash Gupta, head, financial services, Deloitte India.
According to a recent report by Cushman and Wakefield India, there is a year-on-year drop of 15% from January to September 2012 in PE deals in the real estate sector.
Research also shows more residential sector deals vis-à-vis the commercial sector, and that PE players prefer metros to other cities.
Analysts say PE players have also started dictating prices for projects. So, while developers may be unable to raise price due to market conditions there is no room to slash prices.
"PE players currently have a more active say in deciding prices. But if prices do not increase for, say two years, it is an automatic price correction," said Bhagat.