India poised for $5 bln wave of PE exits from property-Nomura

Thu May 19, 2011 7:31am EDT

* Exits to put further pressure on developers

* Investors in 2006-08 boom years may look to cash out

* India property sector hit by access to capital, price falls

By Indulal PM and Rajesh Kurup

MUMBAI, May 19 (Reuters) - Private equity investors are poised to exit roughly $5 billion worth of Indian real estate investments in the next two or three years, a Nomura report said, adding pressure to a sector struggling with access to capital and falling property prices.

During the boom years of 2006-2008, India attracted an influx of private equity in property, a big chunk of it structured as debt, and in some cases developers will be forced to buy back the investment from the PE firms, the report said.

"This will increase pressure on developers to generate cash flows through affordable pricing and better execution," Nomura analyst Aatash Shah wrote.

"The fact that a large section of those investments are actually quasi-debt in nature and the projects in which investments have been made are significantly delayed, is a cause for concern as far as the cash flows of developers are concerned," the note by the Japanese investment bank said.

Shriram Properties, DLF , Lodha Developers, Phoenix Mills and Unitech are the top recipients of private equity in the industry, it said. Top PE investors are Kotak Realty Fund, Red Fort Capital, Citigroup , Sun-Apollo Ventures and Bank of America-Merrill Lynch , it said.

The property industry has had a harder time attracting bank financing following a spate of scandals over the past year and worries about business practices in the thinly regulated sector.

Rising lending rates and volatile equity markets have also clouded the fund-raising outlook for developers, many of which have put their IPO plans on hold.

"Availability of capital will continue to be constrained," said V Hari Krishna, director of the $750 million Kotak Realty Fund, an arm of Kotak Mahindra Bank , which in March sold a property to Tata Realty Fund for $117 million.

"This will improve deal prospects for PE investors, even though top line of the underlying projects may also be negatively impacted owing to high interest rates and thereby pressure on home buyers," he said.

Private equity funds have invested $10.2 billion in the industry, both in projects and companies, since March 2006, of which $8.2 billion was invested in 2006-2008, the report said.

With investments maturing, pressure is mounting on fund managers to exit holdings as the Indian property sector has not convincingly shown profitable exits, said a fund manager at a U.S. bank, which has exposure to India's property sector.

"Of course, there is a pressure. The fund flow may come down unless we see good exits. But, we still think India is a good market and will continue to have a meaningful PE play with quality assets and investments," said the fund manager, who declined to be identified.

Last year, India saw $1.2 billion of private equity exits from property holdings in seven deals, VCCircle.com said.

Commercial property prices in India have fallen this year as supply exceeds demand. Residential prices have been steadier in some cities while falling 10-20 percent in others, said Surajit Pal, sector analyst at Elara Capital.

Prices in India's key markets are expected to decline after rising last year as inventories pile up and rising interest rates deter buyers.

"We are going through a tough time, for sure. As a fund, we are cautious in making investment decisions," said Ramesh T. Jogani, chief executive at Indiareit, a property fund, backed by 3i Group , which manages about $900 million in assets.

Private equity investments in the Indian property sector totalled $481 million in the first quarter of 2011, up from $122 million a year ago, VCCircle said. (Editing by Tony Munroe)

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