PEs in real estate: Only 14% managed exits in 14 years

A modest 14 per cent of the private equity money invested in Indian real estate between 2000 and 2013 managed to make an exit. And, the exits generated a mere two per cent return, according to the latest study by global consulting firm McKinsey.

These are the internal rate of return (IRR) in dollars, estimated for a sample of 610 exits between 2000 and 2013. According to McKinsey, a total of $9.8 billion had flown into Indian real estate between 2000 and 2008. What explains this?

Investors say one needs to bifurcate the investments made before and after 2008, when the global economy went into slowdown following the collapse of Lehman Brothers. (TOO FEW, TOO LATE)

"A lot of investments prior to the 2008 meltdown went into tier-II cities and large townships, which are witnessing difficulties in securing an exit at the targeted IRRs. After 2009, there has been a change in the way funds have invested into the sector," said Sharad Mittal, head of real estate fund at Motilal Oswal Real Estate.

According to Mittal, most of the investments - debt, structured equity, and mezzanine - have gone into residential projects and have done well. "Very few funds have undertaken pure equity transactions after 2009."

Rajeev Bairathi, executive director (capital transactions group) at Knight Frank, says a fourth or fifth of the funds might have exited.

"Money that got into commercial real estate did not exit because of delays in leasing and approvals, regulatory issues, and market slowdown," Bairathi said. He added that after 2014, global investors such as Blackstone and GIC started buying out commercial properties, giving an exit to developers.

Blackstone has invested about $1 billion in commercial assets here in the past two years.

"Investors had invested in Indian real estate at the peak of property cycles. Then capital values declined. They chose to remain invested, awaiting peak cycles to return," he said.

Lack of exits and returns has seen investors cut their exposure to real estate, which came down to 13 per cent of allocation between 2009 and 2013 from a high of 24 per cent between 2005 and 2008.

However, there are some like Sunil Rohokale, MD & CEO of fund manager ASK group, who do not agree with McKinsey's findings.

"The story is not as bleak as projected by McKinsey. Some of the offshore and domestic fund managers have done well. Only because they did well in the first round could they raise funds in the second," said Rohokale.

According to him, most funds generated returns of 14-15 per cent in rupee terms.

"Indian fund managers have done well in rupee terms and not so well in dollar terms. Whatever gains they have made, currency has taken away the returns," he said.