Real Estate: Sellers may find buyers, but prices will remain low
About $5-7 billion, probably more, sunk in real estate ventures, are looking for exit. The investors are property and private equity funds which raised money from wealthy savers across the world to invest in India’s booming realty market between 2005 and 2008. These funds have run their course and their managers are now looking for ways to return the money — at least some of it — to the original investors who were promised high double-digit returns in the go-go years when the numbers appeared achievable.
The investments happened in stocks and quasi-equity structures (with built-in returns) of companies that owned land and half-done projects initiated by local developers which stepped in as JV (joint venture) partners. The Indian partner promised quick clearances, cheap labour and ready buyers. In many cases the story has taken a different turn, thanks to delays in approvals, cost escalation, softening property prices and choosy buyers, the cycle of funds.
A well-known builder in Bangalore — known for its decent construction and handing over keys to home buyers on time — is stuck with 170 acres of land it jointly owns with a PE (private equity) fund. Neither does the local realtor have the money to buy out the fund nor can it attract new financiers who are convinced about the bankability of a new project — be it commercial office space or residential towers. There are many others who find themselves in similar situations.
But as in all markets, there is always a price at which goods change hands. The quagmire for many developers and their sophisticated fund partners has emerged as a landscape of opportunities for other breeds of financiers. The new investors are snooping around for deals where land, under-constructed buildings and townships can be bought cheap from distressed buyers. Only a beaten down price can justify their entry and enable them to generate 20-22% return, else, after seven years they would be left stuck like the sellers who are stranded now.
PRICES TO STAY LOW
Second, battling slow loan demand from corporates, local finance companies are going long on realty — lending to investors and developers, they believe, are buying cheap. If the market takes a long time to pick up — and property markets often take years to lose gas — another set of investors would be left with burnt fingers.