A high networth individual (HNI), invested in a real estate fund in 2005. The fund made some big investments including buying a substantial stake in a building owned by a media group in South Mumbai, but the individual has not made any returns (on investment) till date. The fund, an offshoot of a major private bank, was started in 2005 and made some major investments till 2008. The worried investor, while sharing his story with HT, said that he hopes to make some return when the fund matures in 2012-13.
As scams and controversies loom over real estate, private equity (PE) investors are finding it difficult to stand by the sector in times of crisis. While most funds with an eight-year cycle have not yielded returns on investments, investors wanting to raise funds abroad are finding it tough to do so.
Investors are complaining about real estate-focused funds that had promised a lot while raising money but are unable to deliver. Even new investors, mostly foreign ones, are acting cautious.
According to industry experts, 2010 witnessed a high level of fund-raising and investment activity among domestic PE players who manage rupee funds as opposed to PE funds with FDI money.
“The challenge for PE funds is to differentiate themselves from peers as most of them operate in the same space. Also interest in attracting investor funding from a group of investors is an issue, which is further exasperated by funds having already invested in existing funds. Secondly, thanks to the financial crisis, investors have not been able to realise their expected returns from these existing funds and hence are being careful in investing in new PE funds,” said Avinash Gupta, head, financial advisory, Deloitte, India.
Industry experts say that PE funds will be cautious with investing in real estate. “These funds are finding it difficult to raise money and this will reflect in their investments in India. We feel that residential real estate prices will not rise as sharply in 2011 as they did in 2010,” said Anshuman Magazine, chairman and managing director, CB Richard Ellis, a real estate consultancy.
According to an industry expert, one of the reason for PE funds’ difficulty in giving good returns to investors could be that most investments in India are done at around 8 to 10 times the earning (gross earning to equity). Apart from India, the ratio is at the most 7 times the gross earning, said an PE player.