Private equity (PE) firms were the top investors in the 2006-08 boom years of Real estate. But the recent situation shows that they look ways to exit. Though they aim to exit profitable returns hold them tight in the field. Fallout of negative returns from their real estate investments makes them rethink of their exit.
As against their expectation of 20-25% returns post tax, most PE firms received zero returns. This situation where the same commodity is being chased by too much hot money led by improper diligence, left no chance of return for the PE firms.
Investors’ margins were narrowed down slowly by the increased land prices and buyers’ higher resistance. Decision to exit investments has been postponed by many PE funds as there is only a lower return from their investments. Meanwhile the bigger PE firms showed a higher level of caution in avoiding all forms of investment as there has been a drop in the value.
Last four years have witnessed an exit of $3.2 billion of private equity investor. This proves that the real estate India is under the hands of developers and investors who make use of all the opportunities to buy and sell in at their whims and fancies. They are more like short term investors or hot money stalwarts who do it not for a long term basis.
Cushman & Wakefield a notable property consulting firm reported that there has been a 15% drop in the PE investments. This occurred in the first three quarters of this year. Uncertainty that roams around the investment scenario and the government policies caused this drop in PE investment.
Reality tells us another story of private equity funds. PE came to the lime light in the last decade by gathering streams. PE firms had raised a fund of $20 billion by the year 2007 and 2008. This fund was mainly meant for investment in real estate India. Optimistic business plans of the developers assured around 30 % of return. Developers were provided large amounts of capital at ridiculous valuations by the PE fund managers without any visible downside protection.
This over optimism on real estate India caused soaring of valuations. Lands were bought at exorbitant rates in Tier I cities by the developers and investors who aimed at constructing highly priced homes of luxury and as a result the affordability was kept aside. By creating artificial demands they remained successful in raising the prices and selling the properties at higher prices in metro cities. The same was repeated in the minor or two tier cities too by the land sharks. Lack of demand left many projects unfinished and now the government asks the banks to come as help for these projects.
Real estate firm Liasas Foras’ MD Mr. Pankaj Kapoor said that PE investors are left with three choices: Either save their capital and exit or secondly continue with the project optimistically waiting for the tide to turn or finally rely on the hope that black money will continue pouring in.