Pvt equity firms ramp up realty investment to $10b

Ever since Indian finance minster P Chidambaram unleashed overseas investments in Indian real estate sector, there has been close to 150 private equity funds who have lined up with chests to invest in this sector.

According to independent estimates, a total of $10 billion has already been raised through this route and is expected to be invested in the next two years.

"The figure of $10 billion is not a surprise at all. On an average each of these funds have a minimum corpus of atleast $150 million running up to a billion dollar," said Mayank Saxena, Heal - Retail Service Group, Trammell Crow Megharaj, property consultants. Indian and multinational institutions such as J P Morgan, Falcon, 3i, Blackstone, Carlyle, Kotak Real Estate, IL&FS, ICICI, HDFC besides a host of others are storming into this sector.

According to a report by Deutsche Bank, private investors are starting to play an important role in the Indian real estate investment market. At the end of 2005, the total Indian private equity volume was roughly $1.6 billion, accounting for 40 per cent of the Indian real estate capital market. This market is rapidly growing. In 2005, private property companies and individuals' holdings of real estate grew by 40 per cent year-on-year and is growing at double-digit rates.

One more notable fact comes from Venture Intelligence, a research service focused on private equity and venture capital activity. "During the April-June 2006 quarter we witnessed PE firms launching funds targeting over $8.7 billion for investing in India. A majority "� over $5 billion "� of the new fund raising activity was aimed at real estate investments," said Arun Natarajan, Founder & CEO of Venture Intelligence.

The funds obviously are guarded in talking about their plans but real estate companies such as Mantri Developers, GCorp, IDEB, Sobha Developers who have received funds are upbeat on these investments. Detailing a few recent investments and funds, an industry analyst highlighted that Morgan Stanley invested Rs 300 crore in Mantri Developers in Bangalore, Merrill Lynch invested around Rs 250 crore in Panchsheel Developers while Siachen Capital, a New-York based fund has reportedly invested close to Rs 500 crore in Nitesh Estates. "The list goes on. Tishman Speyer Properties has formed a joint venture with ICICI Ventures and plans to invest about $1 billion in India within the next five years," the analyst highlighted.

Says Sushil Mantri, MD, Mantri Developers: "We are excited to be partnering with Morgan Stanley to grow our residential business. The partnership will be integral to our ability to create value by expanding our presence in Bangalore and other key markets. This relationship is also an important step in the diversification of our business. We plan to utilise our partner's relationships and global platform to strategically expand our business by developing other real estate asset types."

Added a spokesperson for Morgan Stanley: "We believe India presents an extremely compelling investment story and expect to be a long term investor in the real estate sector.

The residential market is attractive because of rapid urbanisation, the availability of housing finance and the strong growth of the consumer segment."

Putting this rush of investments into the real estate sector in perspective, the Deutsche Bank report states that that although the Indian real estate capital market is still small, its growth momentum so far is remarkable, especially in the private equity and debt markets.

"In 2005 nearly $850 million additional capital was invested into Indian real estate. Strong growth in private equity was driven by unlisted property funds and companies, which added around $ 82 million to the market, as well as by private individuals. However, even more significant growth came from private debt (i.e. bank lending for commercial real estate), with commercial banks lending $545 million during 2005," the report noted.

This trend of private equity funds flowing into real-estate market is expected to give a stiff competition to the traditional debt route. "Owing to a lack of alternatives, commercial bank lending seems to be the most efficient way of raising capital in India. But both the private equity and private debt markets are also set to grow significantly over the coming years, profiting from further project developments and more foreign direct investment," the report noted.

In contrast, the public markets are set to remain relatively small over the next years. In 2005, only $1 million was added to the public market. These segments are set to remain relatively small until the private markets increase in scale and, more importantly, the broader capital markets undergo significant deepening and development.