Since India eased rules on inward investment in the construction industry in early 2005, foreign investors have earmarked an estimated $20 billion for the booming property market. But government figures show only about $2 billion has actually been spent in the last three years.
Funds used to complain that Indian developers slapped inflated price tags on themselves, their land, and projects.
But a fall in company valuations, and prospects of a drop in overheated land prices, has cheered private equity investors while making life tougher for developers.
"It's brutal," said Parry Singh, managing director of Red Fort Capital, which runs a $300 million fund that includes sovereign wealth fund money.
"Capital markets are shut down for developers who thought money was always there," the ex-JPMorgan banker added. "Banks are very conservative. Little boys aren't getting any debt, big boys are getting it but on a global scale, it's very expensive."
Indian banks are banned from lending for land purchases and the central bank has raised the cash reserve ratio by 75 basis points in the last two weeks, which could crimp other loans and raise lending rates from the 12-13 percent charged now.
"Developers are a lot more realistic than six months ago because of the credit squeeze," said Richard Yue, chief executive of Arch Capital Management, who runs a $400 million Asia property fund set up by Philippines developer Ayala Land
The failure of Dubai-backed developer Emaar MGF Land to push through a $1.6 billion initial public offering in January was the defining moment for developers.
Pune-based developer Vascon Engineers Ltd has postponed its IPO and Unitech Ltd has shelved a planned $1.5 billion private placement, according to property analysts.
"After the Emaar MGF debacle, there's been a marked shift to private equity capital-raising," said Rish Tej, chief executive of Sheer Trade Consultants, who brokers private equity deals.
"But it's at the project level," he added. "Developers are trading as low as 60 percent of net asset value and don't want to dilute at such low valuations."
Among recent private equity deals, Parsvnath Developers Ltd sold a 30 percent stake in a Mumbai project to Euronext-listed Yatra Capital and Saffron India Real Estate Fund for $46 million.
Deutsche Bank's property arm RREEF has taken a stake in unlisted developer Golden Gate; Morgan Stanley has bought into three developers, and Citigroup is working with Bangalore-based Nitesh Estates on projects, including construction of a Ritz Carlton hotel.
And, although the firm says it has $125 million in cash and doesn't need the money, Mahindra Lifespace Developers has teamed up with Arch Capital Group on a township project.
"We brought them in, not for the capital but for their design, budget and development capabilities," said Mahindra's executive director, Arun Nanda.
"One thing that upsets me is that India has pharmaceuticals, IT and auto industries comparable to the world," he said. "But you go to a construction site and we're still 50 years behind, with people carrying things on their heads and bamboo scaffolding."
Turmoil and tantrum
The coming year is the ideal time to be an investor in Indian property, Nanda said, because land prices should fall after quadrupling in many areas in the last three years.
However, after a cooling period, long-term demand will be huge for new apartments, shopping centres and offices in an economy growing at around 8 percent a year, he added.
"I'm quite excited with what's happening," Nanda said. "I feel the market will go through six months of turmoil."
Singh, at Red Fort, expected land prices to fall by between 15 and 50 percent, depending on the location, with prices in land-scarce Mumbai holding steady.
"We've been shamelessly making offers of a third of the asking price," he said.
But British developer John Hitchcox, who with designer Philippe Starck founded property firm Yoo and who has invested in two residential projects in India, advised foreign funds against taking on too many partners.
"It's like having five girlfriends," said Hitchcox, who once dated supermodel Elle McPherson. "They all know of each other and don't like it, and are masters of the tantrum