The recent liberalisation of foreign direct investment (FDI) regulations will not result in immediate investments as fund managers remain bearish on the domestic residential real estate sector. A number of fund managers concurred that though the reforms do help as far as ease of doing business is concerned but is not sufficient to pull the sector out of slowdown. “I will say that both the entry and exit guidelines are a step in the right direction but I doubt if this will immediately lead to a flurry of FDI investments because of the lacklustre market conditions,” said Vikas Chimakurthy, director at Kotak Realty. For funds to actively scout for projects, core fundamentals have to improve, Chimakurthy added.
That a number of overseas funds burnt their fingers, having invested during the peak period of 2005-2006 is a major overhang fund managers are still grappling with. “The track record of funds making money from India has not been great. In some cases, fund managers have struggled to recover their principal sum. Large number of investments have not met their return expectations,” said Prakash Kalothia, managing director at Sun Apollo India Real Estate Fund. Around 10 years back when FDI policy was first liberalised, a number of funds like Morgan Stanley, Goldman Sachs, Citigroup, Wachovia and Lehman Brothers invested heavily. But after the 2008-2009 crisis, some of these funds shut shop overnight and for those that remained, the project underwriting assumptions made suddenly looked unrealistic due to several factors such as cost overruns, execution delays and confusion regarding put-and-call options. Hence international funds are jittery about investing in a market that is squeezed off demand. As Chimakurthy pointed out, asset prices have largely remained stable across markets, with even a downward bias in some pockets.
It must be said though that domestic PE funds are on a rampage to lap up distressed projects, in sharp contrast to international funds, mainly armed with structured debt or mezannine finance. According to property consulting firm, Cushman and Wakefield, PE investments last year increased by 80% comparable annually to $2.4 billion, only 30% of which came via FDI. This year too the trend is no different. Investments in the second quarter was pegged at just over $1 billion (18 deals), the FDI portion comprised only 31%.
These investments typically are highly collaterized and also bear pre-determined terms of exit, often exceeding 25%. While some funds are digging these investments, others say higher returns can be generated should the demand improve.