PE funds & proposed REMF: Good avenues

Updated: Dec 31 2006, 07:07am hrs
Private equity players have about $5-6 billion of dry powder, a large part of which will be invested in 2007. However, they will face stiffer competition with other funding options as more real estate companies would tap public capital markets including overseas alternative markets. Further deregulation of FDI such as permitting investments in finished real estate stock and REMFs (Real estate mutual funds) would result in additional capital inflows into the sector. However, infrastructure spend needs to keep pace with real estate development, else there would be lopsided development and consequent erosion in value.

Valuations of real estate companies need to become realistic. The rush to tap public capital markets would continue, and abundant caution should be exercised to weed out players.

Key metros will continue to be the biggest economic drivers and will continue to attract large investments in real estate, but may not see sharp appreciation in prices. Tier 2 cities will also be growing popular.

Redevelopment will happen in key metros, especially Mumbai and policy changes. Residential areas and townships will continue to be popular asset classes for investment. The SEZ policy will become clearer in 2007 and would result in financial closure of several SEZ projects.

Investors should be sensitive to not just location but also to the timing of development. Interest rates are likely to rise further and investors should ensure that they have adequate capacity to leverage for a long-time horizon. Valuations in the secondary market have to settle down.

Opportunity to participate in listing gains will be limited due to the tremendous demand for new paper that has reduced chances of allotment. Investments in PE funds/ proposed REMF provide a very good opportunity to enter at land stage across asset classes, at attractive entry prices and also be protected by safeguards.

The author is executive vice-president, Edelweiss Capital