* 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
By Indulal PM and Rajesh Kurup
MUMBAI, May 19 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)