The private equity (PE) story for real estate in India has had a chequered past. Private equity real estate (PERE) investments in India stood at $6.7 billion in 2007 and $3.31 billion in 2008. It declined to $0.84 billion and has remained sluggish since then. It stood at around $0.85 billion in 2011.
In the financial year 2011-12, PERE investments stood at $700 million, during the first to the third quarter. This is around 15 per cent lower than the same period the previous year. The main reason for this slowdown has been difficulty in raising funds focused on real estate sector in India. After the global financial crisis of 2008, few realty funds have been able to raise the intended fund corpus and their fund raising timelines were substantially delayed.
PERE in India has suffered mainly because of the following reasons:
Returns from PE funds in general have not been very encouraging. Perhaps expectations were not managed properly. Investors also believe that they can make more money investing in real estate than going through the PE fund route.
The funds are close-ended and typical tenures are 6-7 years. There is therefore a long lock-in and liquidity for such investments is moderate or low.
Investors’ communication has been lacking and investors perceive lack of customer centricity in PERE sector in India. Investors have often expressed concerns about lack of adequate disclosures and communication from PE funds.
The fee structure charged by the funds has not found favour with the investors.
Recently, market regulator Securities and Exchange Board of India has raised the minimum investment in PE funds to Rs 1 crore (from Rs 5 lakhs under venture capital funding regulations) under the Alternative Investment Funds (AIF) guidelines, which has significantly reduced the investor base for fund raising.
On the downstream part, lacking transparency in the sector and developers’ lacklustre effort in improving operational efficiency in the sector has not helped in institutionalising real estate financing. Some of the private equity investments have suffered due to information asymmetry prevalent in the real estate sector in India. This has reduced PE interest in the sector despite its huge long term growth potential.
These factors outlined above coupled with an increase in risk aversion among investors in the post global financial crisis era has shifted the focus from “opportunistic funds” to “value added” or “core plus” funds. Such funds offer moderate returns with low risks.