With large overseas investors preferring to forge direct partnerships with developers, India-dedicated real estate funds have raised far less in 2015 than in previous years. Money mopped up has almost halved to $413 million between January and November compared with the same period in 2013, data sourced from VCCEdge shows.
Rather than invest in a pool of funds, foreign investors want to put money to work directly with developers, explains Anuj Puri, chairman and country head, JLL India. As for players at home, as Shishir Baijal, chairman and managing director, Knight Frank India, points out, they remain fence sitters waiting for prices to appreciate. “The demand for residential real estate is still subdued,” says Baijal, adding that with inventories piling up, any meaningful rise in prices is still sometime away.
While foreign investors have deep pockets and are convinced India could be a good bet, the weakening rupee, unattractive risk-adjusted returns and the lack of exits are deterring factors.
Amit Bhagat, CEO, ASK Investment Property Advisors, feels the euphoria of 2007, when overseas capital was rushing into Indian realty market, is unlikely to come back in a hurry and the market is unlikely to see repeat investors.
“There is still an absence of a track record in terms of exits. Of the $25-$30 billion invested, only $5 billion has exited the market, which will prove to be a dampener for raising further capital,” Bhagat says. ASK, however, has raised Rs 1,250 crore in domestic funds in the last one year, and $50 million in an offshore fund. It has assets
under management of Rs 3,300 crore.
Last year, a group of 69 NRI investors had filed a case in the Mauritius Supreme Court claiming $103 million in damages from ICICI and associated companies, alleging that they have suffered losses on their investments made in Dynamic India Fund III, or DIF III, promoted by ICICI Venture Funds Management Company (ICICI Venture) and ICICI Bank.
In another case, an associate company of private equity fund SUN AREA Property Partners (formerly SUN-Apollo) had a long-drawn tiff with Mumbai-based developer Rustomjee Group, in which it had invested around Rs 235 crore in 2009-2010. The fund was alleging charges of fraud and mis-utilisation of funds by Rustomjee’s holding company Keystone Realtors Pvt. Ltd, in which investments were made. The dispute was finally resolved in 2013 in an out of court settlement, details of which remain unknown.
Vikas Chimakurthy, director, Kotak Realty Fund, also says that most of the LPs are still observing India from the sidelines. “The rupee’s depreciation against the dollar is a concern for global LPs. Hence, from a risk-return perspective, they may find other markets more attractive than India. Currently, there are very few LPs who are looking at allocating money for India market.”
Foreign investors’ apathy towards India has seen little overseas money getting raised by India-focused real estate funds in the last few years. Unfortunately, some of those reasons still remain. The rupee for instance has depreciated by a sharp 32% in the last five years. In 2010, it was at Rs 45.10 to the dollar, and closed at Rs 66.21 on December 23.
However, marquee developers have been able to raise Rs 7,000 crore from overseas pension, sovereign and private equity funds in 2015 at entity levels. The top deals of the year include Government of Singapore Investment Corporation (GIC) investing Rs 1,500 crore in Bengaluru-based developer Brigade, two sets of investments in Shapoorji Pallonji with Canada Pension Plan Investment Board (CPPIB) investing Rs 1,399 crore and Standard Chartered, IFC and ADB together investing Rs 1,300 crore, and Piramal Realty getting Rs 1,807 crore from Warbug Pincus and Rs 977 crore from Goldman Sachs.
Khushru Jijina, managing director, Piramal Fund Management, explains that the reason for this is that the way capital is approaching India as an investment destination, is itself undergoing a change. “We think the capital is a lot more informed about the general investment thesis, more actively involved in the underwriting, and more cautious in the choice of partners. There is therefore definite investor appetite for Indian real estate but on very distinct terms.”
He says that there is a significant increase in the appetite of large institutional investors who are mapping out an India entry strategy. “Naturally, these conversations take time and it is likely that this capital will also flow in the form of separate accounts and JVs that we have seen being set up recently, rather than the fund formats that marked the earlier vintage years,” Jijina says.
“This is a distinct sign that the market is maturing,” Puri of JLL India observes. He says that it is becoming more clear that the capital will only go with funds and developers who have a track record of giving exits and execution. “Capital is not freely available, which is a good sign for the market,” Puri says.
During the year, Motilal Oswal, ASK Group, Reliance Alternative Investment Fund, IIFL and Griha Investments were among the top fund raisers, the data shows.