'Good returns from realty are a challenge'

Q&A: John J Kriz

The domestic real estate companies needed to be more transparent and efficient to attract more global investments into the realty sector, stressed John J Kriz, managing director, real estate finance, Moody's Investors Service. In a chat with Raghavendra Kamath, Kriz said it was a challenge for foreign investors to get good returns from the property markets of secondary and tertiary cities. Excerpts:

How do foreign funds see the domestic real estate sector?

There is an enormous interest among international investors to invest in the real estate of Bric countries, especially India. But having said that, it is challenging for companies to generate attractive returns in these countries, which are dependent on a host of factors. India is competing with other fast-growing economies for a share of the global capital.

But are they becoming cautious over the fears of a slowdown in the realty market?

They are becoming cautious more on the grounds of a slower rate of returns in tertiary and secondary cities than on fears of a slowdown. It is a challenge for international investors to get higher rate of returns that will be over and above the rate of hurdles.

In the secondary cities, even if the rate of returns is higher than that in metros, the risks are higher too. Investors thus have to factor in this phenomenon. They are cautious in the sense that they do not invest in the property market after it has peaked. But the major challenge for them is the lack of a large public real estate market, where they can invest directly.

What do you make of the Indian realty companies rushing to list on the AIM?

I look at this as a very healthy trend since many of the companies are starting off. It gives them exposure to a wider range of capital abroad and faster liquidity. If they have good governance and transparent practices, they can build a sense of stability and confidence among international investors, who are very keen on these factors.

What do you think about the finance ministry's move to treat FIIs as FDI in pre-IPO placements of real estate companies?

It would certainly impact the FII funds flowing into real estate. But it is interesting to see how the FIIs will invest in realty firms under the law, if FIIs are treated as FDI.

What do you think about the drastic fall in prices of the domestic realty stocks?

It is a temporary trend. These companies should increase their efficiency in the financial market with timely information and disclosures. You should give reasons for investors to stay with you.

Transparency and efficiency will trump the liquidity concerns of the firms as they can always look for global investors with these factors. Being public is becoming disciplined and everybody will gain from it.

Do you see any major correction in the Indian property prices?

Market forces are more accurate in deciding that than surveyors' projections. As far as fears of a major correction go, we see this as a minor issue for the commercial property business. It would not affect the investment plans of international investors, who are eager to participate in the growth of the Indian economy.