Triggers: Subprime losses, downturn in domestic market.
Hurt by subprime crisis in the United States and Europe and global slowdown, most of the property funds have increased their internal rate of return (IRR) expectations from realty developers from 20-22 per cent to 27-30 per cent, to provide cushion in case of any major crash in realty market in the coming months.
The huge losses in sub-prime, coupled with the downturn in the domestic market, has upped the risk profile of emerging markets, including India, and global investors have raised risk adjusted returns by 5 to 7 per cent, said a cross section of realty funds, developers and investment advisors Business Standard spoke to.
According to estimates by Bloomberg and company reports, US and European banks and funds have declared nearly $200 billion of sub-prime losses so far with Citigroup and Swiss major UBS accounting for one third of losses.
"We were doing deals at 20-24 per cent IRRs, now we expect 26-28 per cent. Due to uncertainty in property markets, the return expectations from investors has gone up,'' said Deep Kantawala, director of Property Zone, the advisor to Triangle Indian Real Estate Fund, floated by South Africa's Old Mutual and Mumbai-based ICS Realty.
"Earlier European and US investors were happy with 5 to 6 per cent yields, now they want 8 to 9 per cent after the slowdown in global markets. When the risk profile of developed markets has gone up, that of emerging markets has also gone up further,'' he added.
Incidentally, a number of property developers such as DLF, Unitech, Emaar MGF and Parsvnath have announced nearly $4 billion (nearly Rs 17,000 crore) of fund raising from private equity funds in the current financial year.
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However, big companies are less likely to be burdened with new rate expectations since they have already acquired land parcels long time ago and tied up with investors for the project funding.
"We are giving 30 per cent returns in most of our projects because we have acquired land long time today. But if you acquire it today, it would be impossible to give such returns,'' said Mahesh Iyer, chief financial officer of property developer Phoenix Mills, which is raising nearly $350 million from PE funds for its hotel and other projects.
Private equity emerged as a favourite source of funding for property developers in the last year or so as the Reserve Bank of India put curbs on loans to developers, increased lending rates to realty companies, clamped down external commercial borrowings among others.
Developers are also hit on capital markets as most of realty stock falling 60 per cent from their peak in January.
According to investment advisors, the uncertainty in Indian property market is giving jitters to property funds, most of them have also exposure to international property markets.
"Many of them are not sure how the property market is shaping up in the long run. Liquidity has certainly dried up for developers. Investors are taking all this into consideration while asking returns,'' said an analyst from property consultancy Jones Lang LaSalle Meghraj.
Apart from increasing rate expectations, the fund flow is slowing in Indian property sector, if the latest figures from capital market regulator Sebi is anything to go by. The inflows have dropped 14 per cent from Rs 7,285 crore in March 2008 to Rs 6,286 crore in June 2008.