PE cos cautious on real estate projects

Written by Rachana Khanzode | Mumbai | Updated: Jan 4 2011, 16:40pm hrs
Given the tough phase that the real estate segment is going through, private equity (PE) players are either limiting themselves to high-return residential projects or have adopted a cautious approach before investing in real estate projects.

PE players are expecting an internal rate of return (IRR) of about 20-25% on their investments, compared to an IRR of 10-12% that PE players were seeking when the realty market was at its peak. Therefore, developers seeking the PE route are expected to see some impact on profit margins and delay some of the projects scheduled to be launched in 2012-13. At the same time, some developers are expected to focus on affordable housing to generate short term cash.

With the bank loan rates going up, private equity players are increasing the threshold on returns and we are already seeing an expectation of IRR upwards of 20%, Vikas Chimakurthy, director-investments, Kotak Realty Fund, said. Developers are receiving construction finance loans at about 12-13% while NBFCs are looking at a return rate of 16-17%, points out one private equity investor. Sunil Rohokale, executive director, Ask Investment Holdings, said, Since the PE player takes a sizeable risk in a real estate project, he expects a higher return. They are already looking at a return rate of about 25-30%. This is expected to delay some of the projects that are lined up for 2012-13, though projects on completion in 2011 might not see an immediate impact. During the course of time, if prices go up, the developer may witness higher returns.

Rohokale also added that the firm was focusing on residential projects that indicate high returns. Interestingly, the IRRs are expected to come down only when occupancy shoots up. However, according to a report by Prabhudas Liladher, the registration data in Mumbai showed a decline of 16% YoY and 19% MoM in November 2010, while Mumbai suburbs showed a 21% YoY decline.

Developers may have to stabilize on prices though we are expecting a price increase in Navi Mumbai, Joy Sanyal, head of development initiatives, Jones Lang LaSalle India, said. We haven't seen the investor equity going down completely. So the profit margin of the developers would be impacted though we might not see any liquidity crunch, Sanyal adds.

Developers are also now either pre-launching their affordable housing projects or coming up with innovative schemes to attract buyers. For instance, Housing Development & Infrastructure advanced the launch of the second phase of its Palghar project in December 2010, which was due to be opened in January 2011.