Foreign Funds Shying Away from Indian Real Estate

Having burnt their fingers during the economic slowdown of 2008-09, foreign private equity (PE) funds continue to stay away from Indian real estate, even as domestic funds have taken the lead in property investments. While domestic funds have put in $864 million (Rs 3,950 crore) in 22 realty deals since January this year, foreign funds have invested a mere $126 million (Rs 575 crore) in only three deals, according to data collated by Venture Intelligence, which tracks PE and merger and acquisitions in India. During the property boom of 2004-2008, foreign funds put in millions of dollars in realty projects, expecting huge returns. Their investments peaked in 2007, when they put in around $5.73 billion (Rs 26,100 crore) as against $ 4.05 billion (Rs 18,500 crore) put in by their domestic counterparts. But the global economic slowdown of 2008-09, which led to lower home sales and redemption pressures on PEs, spoilt the party. Indicating poor risk appetite, foreign funds invested $183 million (Rs 835 crore) in Indian real estate in 2009, while domestic funds put in $665 million (Rs 3.030 crore).

“Most foreign funds are sitting on pre-crash investments which are terribly under water. Limited partners (investors in funds) have lost badly in the downturn and their current focus is more on salvaging investments than taking fresh exposure. Moreover, they still believe that India is overpriced,” says Jacob Matthew of Mape Advisory. Says Ashish Joshi, managing partner, real estate, IL&FS Milestone Fund: “Foreign investors are playing safe and are sceptical. Since one of the biggest reasons for the economic crisis was real estate, there is a rub-off impact and overseas PE funds are staying away.”

But why are domestic funds continuing their investments? For instance, during the first half of this year, the deal flow of domestic funds and amount invested have gone up by 36 per cent and 240 per cent, respectively, compared to last year. “Domestic funds can gauge the pulse of Indian real estate. Moreover, they can invest in any project of any size, unlike foreign funds whose investments are governed by FDI norms,” says a managing director of a domestic PE fund.
A number of Indian fund managers such as Indiareit, Aditya Birla Financial Services and ICICI Venture are raising or are in the process of raising around Rs 6,000 crore from domestic institutions and high net worth individuals. But non-property investments by PEs are still booming. In the first half of calendar year 2010, total PE investments touched $4.571 billion (Rs 21,380 crore) across 138 deals. This was a three-fold jump over the $1,508 million (Rs 7,000 crore) invested in 111 deals during the same period last year, according to Venture Intelligence data. “The Indian market is not cheap. They have the option of investing in other geographies where the market is cheaper,” said Vikram Hosangady, executive director-advisory transaction services, KPMG.