Realty stocks expensive: Kotak Fund

MUMBAI (Reuters) - India's real estate stocks are too expensive following a sharp rally since March, making it hard for real estate funds to close deals, despite being cashed up, a senior official at India's Kotak Realty Fund said on Tuesday.

The fund, a unit of Kotak Mahindra Bank (KTKM.BO), believes home prices have bottomed, but office and retail space will see more pain as supply outstrips demand, Vikas Chimakurthy, a director, told the Reuters Global Real Estate Summit.

"We won't invest in a listed real estate company at these prices," said Chimakurthy, who was earlier an investment banker at Kotak Mahindra Capital, the former Indian partner of Goldman Sachs (GS.N).

The fund, which has not invested a majority of the $700 million raised between 2005 and 2008, will instead focus on unlisted firms, he said.

"We believe most of the listed real estate stocks are overpriced."

Investors could be in for a rude awakening when real estate firms post their quarterly results, he said.

The BSE real estate index .BSEREAL has surged almost 1-

times from its low in March, compared with an 82 percent slump in 2008, indicating a bubble was rebuilding itself, he said.

In comparison, the main stock index .BSESN is up 75 percent from its March low.

"For the current share prices to be justifiable, the sales have to improve far more significantly," he said. "Some large companies need to sell 300-500 apartments a month to justify these values, but are hardly selling 12-15."

Home buyers have started trickling back in key markets such as Mumbai and Delhi, emboldened by price cuts of as much as 40 percent, helping developers battered since last year as the global financial crisis cut off funding and demand vanished on inflated prices.

"The current situation of a nascent demand recovery, driven by lower pricing does not seem to suggest that a combination of high volumes and increased pricing can be a reality," said Nomura analyst Aatash Shah.

The return of some demand and a share price rally, triggered in part by a decisive federal election result, has boosted share sale plans of cash-strapped real estate firms.

"Had this exuberance not happened in real estate QIPs (qualified institutional placements), one would have seen some deals closed with private equity funds," said Chimakurthy, who last closed a deal nearly a year ago.

So far this year, there have been only $90.7 million worth of private equity deals in the Indian real estate sector, versus $376.7 million a year earlier, Thomson Reuters data showed.

In April, the country's second-largest listed developer Unitech (UNTE.BO) sold shares worth $325 million to institutions, while founders of bigger rival DLF (DLF.BO) raised $780 million by offloading 10 percent.

Third-ranked Indiabulls Real Estate (INRL.BO) sold shares worth $550 million in May and at least 9 more realty firms have got shareholder approval to sell shares worth more than $2 billion, according to Thomson Reuters data.

Kotak is looking at several deals, mostly in the unlisted space, Chimakurthy said. He declined to say when he expected to finalize a transaction, but predicted prices would drop -- at least among unlisted firms, as these had limited funding options.

Chimakurthy said he expects huge supplies of commercial space over the next 12-18 months to hurt the segment. While housing prices may have bottomed, he questioned the wisdom behind real estate firms realigning projects to low-priced apartments.

"We have been looking at affordable housing for more than 2 years. Now, we are seeing there is too much supply. People have launched projects, with or without approvals."

(For summit blog: blogs.reuters.com/summits/)

(Editing by Ian Geoghegan)