Declining Index of Industrial Production (IIP), RBI restrictions on banks to lend for real estate and market regulator Sebi?s recent directive on Alternative Investment Funds (AIFs) on the minimum amount of fund each investor has to put in, has painted a gloomy picture for the real estate market which is already suffering under pressure from sales, according to a recent study by real estate consultancy firm Knight Frank. ?In the last four years till 2011, at least one source or the other was active in fund raising for the sector but now that too had changed,? said Samantak Das, national head (research) for Knight Frank India.
Since 2005, 21 real estate companies have raised Rs 21,306 crore through IPO and FPO, of which R14,574 crore or 68% was raised in 2007 alone. This was mainly after the opening up of FDI in real estate sector. However, in 2008 global economic crisis led to dismal investments in the sector. 2009 was no better with just one issue. 2010 was slightly better with five promoters raising R4,312 crore. The study attributes this to a stronger UPA government at the centre. The opening up of the QIP window for realty players along with low interest rates resulted in pent-up demand translating into property sales. Of the total fund raised through QIPs since 2009, 84% came in the year 2009 itself. The year 2011 witnessed a phenomenon of high property prices, high interest rate and low sales. Dismal corporate earnings growth coupled with a weak employment scenario impacted the realty industry.
?In 2011, private equity investments were the savior for the industry,? said Das of Knight Frank India. ?But the structure of PE funding in mezzanine form was as good as debt,? he added. Also, the new Sebi guidelines on AIFs restricted funds from taking investments below R1 crore from a single investor. ?This restricted investors with ticket size below R5 lakh to participate,? Das said. ?New guidelines make it difficult to raise funds,? he said. Fund raising for the real estate specific PE funds is also difficult as the investors are not satisfied with the returns. ?Some will raise funds because of lineage but many new ones will just remain on paper,? said Das of Knight Frank India.
Transaction activity remains slack and prospective buyers are sitting on the fence in anticipation of price correction. The funding avenues exploited earlier seem to have dried up. Between first quarter of the financial year 2010 and third quarter of the financial year 2012, FDI in real estate fell sharply by 92% and its share in total FDI shrunk to 1.94% from 16.83%.
?Economic slowdown in the US and Europe has led to a decline in FDI in the Indian real estate sector,? said Das of Knight Frank India. ?Depreciating rupee is further adding to woes on investments as the international investors do not know where the bottom of the currency is,? says Deep Kantawala, group chief financial officer at real estate and financial services consultancy firm ICS group.
?Real estate has been a clear case of over promise and under delivery,? he adds. ?In 2006-07 when markets were at the peak, real estate sector was quoting and receiving ridiculous valuations with P/E multiples of 20-25 times,? said Kantawala. ?Many investors have burned their hands since then and given a negative feedback to the international investor community,? he said.
Kantawala of ICS group believes that lack of clarity on regulations, transparency in transactions and lack of structured market in real estate are the primary problems for dwindling trust towards it.
