Private equity funds with real estate focus, many of which are nearing maturity, are in a dilemma: while investment valuations in the sector look good, they are not generating the returns promised to investors.
Most of these funds promised 25% returns post-tax, but have been ticking at an average 15%. "This is the right time to invest in real estate for PE funds if they are willing to take risk and think outside metros as the valuations are attractive — but it is the wrong time to raise funds," said the CEO of one of the top RE funds headquartered in Mumbai.
Analysts say high property prices limit the growth of investment, but the desperate need of developers for liquidity boost their bargaining capacity.
"Most investors in RE funds are domestic high networth individuals (HNI) and they may not get returns they were promised earlier," said Avinash Gupta, head, financial advisory, Deloitte India. "But 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."
A a senior executive of a leading PE fund that has about Rs 60 crore to invest before the fund closes within a year claims the situation is not so bad. "Four out of 10 projects we invest in give really good returns and make up for the low return (or no returns) of other projects. The problem is now it’s impossible to get good returns in this market."
One Dubai-based Indian investment banker who had invested in a real estate fund in 2005 told HT, "Till date I have not got any return and I think when the fund closes next year, expecting 25-30% returns (promised earlier) would be foolish."