Friday, May 16, 2008

Realty Gripe Strikes PE Fund Managers

The gripe is now being seen in the stomachs of the fund managers at PE funds. Until December 2007 and a few months in 2008, they were seen sashaying with the developers, wiggling their dollars pulled out of desperate investors in the US, who were facing a massive downturn in their real estate markets. Somehow, these PE funds were able to convince them that India and Asia were insulated from any US downturn, and that instead of earning 4% of returns in US, it was wise to invest for 25% in India.

They are not dancing anymore, instead their ass is grass, if this realty slump in India continues for another 6 months, and most likely it will. We need one nice high in the stock markets, and that seems to be coming, to make retail investors and baby speculators from entering lock stock and barrel in to real estate again. This will be the final high, because, post this, we will see such a severe shock, that it could be that real estate in India will not rise again.

When first mentioned in February, that a top had been reached in real estate, my own colleagues did not agree, but now as they see their homes drop from Rs 60 lakh to Rs 54 lakh, they are beginning to see the dawn of reality.

Now, evidence is showing that nearly 30% of realty deals are stuck as PE fund are asking developers to revalue the deals, else no money would come in. It appears a real close haircut if no a shave is in the offing for realty players. The norms for valuing real estate are no longer butter and jam, but hard crust.

Even Renuka Ramnath of ICICI Ventures, which has raised two funds of $1.5 billion, for India-specific investments, had to be prodded in to saying that these funds would be deployed in to real estate. She was on the BBC, talking more about infrastructure and retail, while the anchor pushed for realty, which she very half-heartedly agreed to. Reading between the lines, basically, real estate is no longer the favorite child of PE funds.

Even Saffron Asset Advisors, a fund that is relatively gung-ho over real estate, is very measured in their words. This fund has raised a lot of money for sector-specific investment, and has a large proportion allocated to real estate. However, Ritesh Vora, director (investments) for Saffron, said evaluations are more rigorous than they were a year ago.

But the situation was not so tough for real estate companies earlier. With the stock market on a downslide, real estate companies deferred their IPO plans and turned to PE funds to raise money. According to ICICI Securities, during the last two years, around 60 funds raised $30 billion in assets to invest in Indian real estate.

According to Cushman & Wakefield’s joint managing director, Anurag Mathur, the focus on delivery timelines, costs, quality and sales targets are now becoming the norm. Om Chaudhry, CEO of FIRE Capital Fund said more realistic valuations of projects are being seen.

Read the Hindu Business Line story here

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Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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