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Worried HNIs queer the pitch for builders

business Updated: Jul 14, 2011 22:50 IST
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Worried by low demand, price pressures and inability of real estate developers to complete projects, high net worth individuals (HNIs) are now asking for written contracts before they invest in the sector.

Industry experts say HNIs have put in about $2 billion in past 12 to 15 months in real estate, either by directly buying property or investing in projects.

“HNIs these days are demanding documentation, earlier it was free money,” said Ved Prakash Arya, managing director, Milestone private equity. Strange it may sound, contracts between HNIs and developers were mostly oral till now.

As cash supply has dried up, HNIs are also demanding huge discounts — as much as 20% — from developers, especially in luxury projects that have seen the sharpest fall over the last three months.

In the past, HNIs would make investment before the construction begins, and buy some apartments in the building at current rate. When the building is ready for selling (often not completed) the bought property would be sold and HNI would pocket the profit (as selling price would have jumped since they invested).

“Developers normally promise 20% year-on-year profit on such investments,” said an investor based out of Andheri who has invested in two projects of well known players. “Now as they are not even able to finish projects, many HNIs are seeking that they put this on paper.”

There are also HNIs who investi at project level and directly share the profits.

As funds are in short supply, “those HNIs who want to take the risk by investing directly in the sector can set the terms,” said Sunil Rohokale, executive director, ASK Investment Holdings.

The PE arm of the company recently raised Rs480 crore from Indian HNIs with an average ticket size of Rs2 crore.