Private equity (PE) investments in India started in 2005, and since then over US$14 bn has been invested in India in more than 700 transactions with around 300 developers across 33 cities. Of the money invested, exits of around US$5 bn have happened in the past 3-4 years. Because of issues relating to appreciating risks in the investments and the long-only nature of investments, around one-fifth of the 125 funds active in 2005-07 remain active now.
Developers have matured on their development plans with many restricting themselves to select geographies, understanding their scalability and organizational restrictions. But we believe that real estate being a cyclical and a low-entry-barrier business, volume growth could come only with smart expansion in new geographies. We prefer Sobha, Prestige and Godrej on this business model in the listed space.
Most institutional investors (equity and debt) believe that the high interest rates while lending to the sector are unlikely to last. Return expectations of investors should sober down. With developers maturing and banks lending more (and cheaper), equity investments are likely to increase in the future (from a near-zero contribution today). We believe a 100 bps saving in interest rates can have a 5% impact on margins over a period of four years.
REITs. Participants remained confident of REITs listing between 18 and 30 months from now. Tax issues, known to all, remain the key hurdle to be crossed, which they believe will clear in the next 6-12 months. We expect around 8-9 large commercial asset listings (from Delhi, Bangalore, Pune and Mumbai) once the REIT structures are finalized.
Substantial progress has been made in getting the REIT structure to bring in retail investments (along with Institutional participation) in real estate (lowering the liquidity risk). On the widely known taxation issues, which are the only impediment for listing of such instruments, the representatives of the law firms estimated another 24-30 months for resolving of issues and listing while the tax practitioners were more optimistic, with around 18 months. This is the fourth draft since CY2008 and with most regulations in order,
stakeholders believe that the ministry of finance will consider and take brisk action post a new government formation.