Funds, funds and funds are the way to go in India’s real estate sector now. In a stock market swinging wildly and property becoming an increasingly tricky asset to invest in, Indian investors are now prepared to put their money in Real Estate Funds.
A slew of Indian companies including Kotak Group, the Piramal Group and Milestone Capital have raised cash to invest in India’s frothy real estate sector. Most of this money is to be invested in the cities, notably the tier I and tier II ones, says Ved Prakash Arya, MD, Milestone Capital.
Real estate funds can be of various types but have a common goal. They all invest in real estate ventures. These may include companies listed on the stock exchange, funds that are listed on the stock exchanges and buying or selling real estate stocks, or directly in developers. They can also invest in Special Purpose Vehicles (SPV) for large infrastructure projects.
Arya intends to invest in local developers and special purpose vehicles from his fund. “Not many people are sure about the deeds while investing in land. Besides, you need to find assets that are affordable and at the same time, which would appreciate in value over time,” he says.
It is not surprising then that the Piramal Group’s IndiaREIT fund decided to raise a further $750 million (Rs 3,031 crore) recently. This is the group’s second fund, after its first instalment of IndiaREIT expanded to Rs 2,500 crore roughly a year after it started with a corpus of Rs 250 crore in August 2006.
"The real estate sector is growing in line with the country's economic growth. There is a shortfall across all sectors, including commercial, IT, hospitality and residential properties. But there already is an existing demand that can only be met with additional funding. All fund houses are raising funds domestically as well as globally," said Ramesh Jogani, MD & CEO, IndiaREIT.
Private equity investments in real estate will touch $7 billion (Rs 28,294 crore) by 2010 and this year it will be around $3 to $4 billion (Rs 12,126 to Rs 16,168 crore), he added.
A report by JP Morgan, the international finance firm, sees India’s real estate sector as the perfect opportunity for growth. The report states that fundamental drivers for growth in the sector are in place.
The report, anchored by Saurabh Kumar of JP Morgan’s Asia Pacific Equity Research Group, also states that the $50 billion (Rs 2,02,100 crore) industry is projected to grow at 9 per cent per annum, reaching $90 billion (Rs 3,63,780 crore) by 2011.
In a growing economy, real estate is a possible theme for diversification of investment grade money, feels TP Raman, MD, Sundaram BNP Paribas Mutual. “It is similar to pharmacia, infrastructure or automotives - growing sectors that offer very healthy potential returns,” he says.
A relative lack of risk also makes this sector attractive to investors. The report states that the sector is in a slight risk of correction in certain parts of the country. But overall, there is no bubble like situation that might burst, sending property prices plummeting.
However, some mutual fund companies feel the time is not right for organised institutional investment in the real estate sector. For starters, there are just a handful of companies listed on the stock exchanges in the country. Of these, barring the large players like Unitech and DLF, much more research needs to be directed towards smaller players.
“It is a pure game of supply and demand and there is very little research unlike other sectors,” says Raman. Unlike in the western markets, where funds and investors can buy into Real Estate Investment Trusts, organisations that are mandated to invest in real estate stocks, there is no such vehicle in India.
“There is a major grey area in real estate investment. Valuations need to be justified, broad guidelines for investment need to be laid out and checks and balances need to be put in place,” says Raman.
However, cities like Nagpur, Indore, Nashik and Ahmedabad are growing explosively. And that is where the opportunity lies, says Arya.
This justifies the recent shift in the investors real estate funds are seeking to tap. Today’s investors are more Indian, as the more savvy investor class looks at investing in land without going through the trouble of looking for it, getting through the process of acquisition, and finally buying it in the right place.