Global funds eye Indian realty pie

Policymakers may be worried about the bubble in property prices, but the stupendous response to the DLF issue shows that global interest in the Indian real estate is at a new high.

Betting on high returns, upwards of 25 per cent, from the property sector, Singapore-based Ascendas, US investment banker Trinity Capital and 3i, an European venture capital firm are among the global funds which are keen on the Indian realty sector. Ascendas will invest Rs 1,315 crore through its India property fund, while Trinity Capital will pour Rs 300 crore into the special economic zone to be developed by Uppal Group and Luxor Group.

Indiareit's offshore fund, in which 3i is anchor investor, will invest Rs 200 crore in the development of an integrated township near Pune.

Balaji Rao, MD of Starwood India, estimates that the real estate sector has seen private equity commitments of $1 billion to $1.5 billion in the last one year and has a potential of $5 billion to $6 billion.

Explaining the rationale behind foreign investments, he said, "With the profound economic growth in India, real estate is a huge story for foreign investors. If you add infrastructure, the domestic capital is not sufficient to meet the gap between demand and supply". The US-based private equity group Starwood has a dedicated global real estate and hospitality corpus worth $2.3 billion, of which it is planning to invest $500 million in India.

3i, which invested $40 million in the Indiareits offshore fund ten months back, is looking at launching another big-sized fund by 2008 to invest into the country's booming properties business. 3i is already working on launching a $5 billion infrastructure dedicated fund in a strategic partnership with state-run India Infrastructure Finance Company (IIFC). The fund will mainly invest into roads, ports, power plants and airports. The VC firm is presently setting up a team in Mumbai for this project.

"We are very impressed with the growth of Indian real estate. By June, we had invested about 55 per cent of our $200 million in the Indiareits offshore fund. By third or fourth quarter of the year, we could raise another fund, which will surely invest into real estate and the fund size will be bigger," Mark Thornton, managing director & co-head (Asia), 3i Investments plc said.

Alarmed by the overheating in real estate and resulting surge in inflation, the government has taken a slew of measures to curb funding in real estate. These include hiking the interest rates, tightening lending to developers, banning on pre-IPO placement by FIIs, blocking preference share route for developers and banning ECBs in real estate. Despite the fears of an asset bubble and a looming correction, foreign funds believe that Indian property looks attractive for investors in the long run. "India's realty sector has a huge potential. The demand for sophisticated houses and commercial properties has been growing, with the rise in incomes. We have a long-term investment objective to participate in this sector. We are not here to make quick bucks and vanish" said Thornton.

Thornton added that fears of overheating end up hurting the small-time investors.

"In some Asian countries, there are cultural barriers which curtail the scope for private equity investments. But in India, people are open-minded, the business processes and capital markets are fine and the private industry is doing well. We are bullish about anything that is to do with growing consumerism in India. Besides, realty and media, healthcare also looks interesting," he said.

Rao believes the anti-inflationary measures brought out by the government was making it easier to strike deals with developers. "Earlier, we used to see unrealistic valuations. But after the government raised interest rates, tightened norms for debt and primary markets, the developers are facing a shortage of funds. We are now seeing a lot of flexibility, which we were not seeing six months ago. They need funds and we want to invest. Hence we are hitting a common ground," he said.

Adds Mahesh Gandhi, director, investment comittee of Trinity Capital, "Regulatory arbitrage is always better for equity funds such as ours. When capital is expensive and not easily available, it presents opportunities for funds to invest in projects".