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Realty funds find it tough to raise money overseas

March 04, 2011

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Half-a-dozen funds have been scouting abroad for about a year to raise up to `3,000 crore each

Real estate funds trying to raise a couple of billion dollars overseas are struggling to tie up commitments, with potential investors put off both by integrity worries over India’s realty sector and still-depressed property markets abroad.

Some half-a-dozen funds have been scouting abroad for about a year to raise between $200 million and $700 million (Rs.900-3,000 crore) each.

This is the second big overseas fund-raising initiative for the sector. In 2006-07, domestic real estate funds got commitments for $8-10 billion, of which about $5 billion made its way to the Indian market.

The foreign money is crucial. India’s real estate sector is poised to expand after a couple of slow years, with developers again taking on large projects, but is held back by a severe fund crunch.

Loans from banks, their biggest source of capital, are tight because of the central bank’s hawkish stance on lending to the sector.

Domestic fund-raising by private equity (PE) firms is on a smaller scale of Rs.50-150 crore.

India opened its real estate sector to foreign direct investment (FDI) in 2005.

“While global investors are themselves relooking at their portfolios, the fact is that they haven’t seen many significant exits in Indian real estate in the past, and returns on investments were not significant,” said Ajit Krishnan, partner, real estate practice, at consultancy Ernst and Young.

“While it will take longer for funds to raise money this time around, we expect to see more exits in the next one year or so, which should boost investor confidence globally,” Krishnan said.

According to property consultancy Knight Frank India, only $400-500 million of foreign funds flowed into the real estate sector in 2009-10.

Ambrish Baisiwala, global chief executive of Atlanta-based Portman Holdings Llc., said it is challenging to raise money in the current scenario. The real estate development company has been in the market since late last year to raise a $200 million India Residential Real Estate Fund.

“Compared to Australia and Japan, which are considered core markets with good valuations and returns, investors still worry about the opaqueness and business practices (in) the Indian property market,” said Baisiwala.

Last year’s corporate bribes-for-loans scam and the investigation into alleged wrongdoing in the allocation of second-generation (2G) telecom spectrum both involve real estate companies.

Subhash Bedi, managing director of Red Fort Capital Advisors Pvt. Ltd, said overseas investors are being cautious because of a devaluation in their real estate portfolios.

“Global investors are turned off by the Indian real estate story, with realty stock getting hammered,” he said.

The Bombay Stock Exchange’s realty index declined 37.51% to 2072.75 points last year, while the wider Sensex index gained 8.76%.

Red Fort is the only realty fund that raised money overseas last year. Last month, it invested about Rs.200 crore in a 108-acre township project in Gurgaon that’s being developed by Ansal Properties and Infrastructure.

Bedi didn’t say how much the fund raised. Overall, it was looking for $600-700 million from overseas investors.

Realty funds said investors, known as limited partners (LPs) by the industry, are now particular about the asset class they can invest in.

The caution stems from the fact some projects they invested in during 2006-07 have not taken off or are stuck mid-way.

“LPs are more keen to look at focused rather than open-ended funds,” said Arvind Pahwa, chief executive, South Asian Real Estate (SARE), which is raising an overseas fund of at least $200 million for investing in projects in India.

SARE is raising money to invest in mid-income housing and Red Fort is looking at large residential and office properties.

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