Real estate funds: upgrading the property market
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The flow of money from real estate funds will prompt developers to get more organised, corporatise themselves and become more transparent. As the level of corporate governance increases, there will be fewer cash-based transactions.
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RAPID POPULATION GROWTH: An ASSOCHAM real estate study has estimated that the demand for dwelling units in the country will grow to 90 million by 2020. PHOTO: S. SIVA SARAVANAN
The foreign and domestic venture capital and private equity investment in the real estate sector in India is soaring, but what does it mean for the common man?
The India growth story has become an established theme that has finally captured the mind of the rest of the world. India is on every international investor's wish list, and among the sectors that have the potential to become drivers of the new Indian economy in a global scenario, real estate ranks amongst the top. The flow of venture capital funds (VCFs) into the real estate sector is likely to touch $7-8 billion over the next 18-30 months, according to a Pricewaterhouse Coopers' report. These real estate and infrastructure investments would help considerably in sustaining the economic momentum of the country.
The year 2005 saw the government relaxing FDI norms for real projects allowing overseas firms to invest in a project with a minimum size of 50,000 sq. metres and SEBI allowing venture capital investment into real estate. Until mid 2004, foreign venture capital funds were not allowed to invest money into the real estate sector in India.
Rapid population growth and an increase in urbanisation have led to a complex housing problem in India. Studies reveal that India currently faces a shortage of 20 million housing units. An ASSOCHAM real estate study has estimated that the demand for dwelling units will grow to 90 million by 2020, which would require a minimum investment of U.S.$ 890 billion (Rs. 40,05,000 crore). This gives tremendous opportunities for international investors due to the inability of local capital to meet these needs.
Changing marketplace
The arrival of the venture capital funds on the real estate scene will impact the market in a number of ways. Developers will get more organised, corporatise themselves and become more transparent to avail of these funds. This will also lead to a rapid increase in development in Tier 2 and Tier 3 cities with these funds reaching farther for opportunities and taking more risk to find suitable investment opportunities. As developers become more transparent and the level of corporate governance increases, there would be fewer cash-based transactions. Developers would have a greater incentive to adhere to development control regulations and follow all development norms. Developers would also not be lax about meeting timelines for completion. Quality of projects is also likely to improve considerably. The investment cycle time will get shorter as funds will try to return capital quicker to investors.
Lower affordability?
While funds would definitely boost the scale of investment, on the negative side, it may have a long-term impact on the affordability of products. Yields (the proportion of rental income to property value) will come down due to increased competition for investment grade property. The unprecedented construction boom could further push up the construction costs. Also, there have been reports that RBI is not comfortable with the rise in investment in the real estate sector driven by venture capital funds, given the potential risks of an asset price bubble, where speculative forces could drive up prices beyond the inherent value property.
Developers to gain
Developers of real estate space will also start emphasising the future trends from a buyers' perspective, which includes a more strategic approach to real estate and greater focus on security and environmental issues. Developers with more access to capital will have greater success in the long run.
Private equity funds would also enable the developers to invest in larger projects and expand beyond traditional bases, and also increase their staying power in the business.
Some funds also bring technical support in the form of processes and construction technology. International funding companies can also bring with them their international client relationships, which also add value. The private equity funds would also bring in innovative financing and exit strategies for the developers.
Very few developers in India currently have a presence in more than one city. The real estate market in India predominantly continues to remain unorganised, fragmented, mostly characterised by small players with a local presence. Developers still need to understand the importance of corporatising and enhancing transparency levels. This will change as the funds would create a number of pan India developers. The funds will monitor projects more closely. Rating of developers and projects would become an accepted norm. The rating of specific projects of developers will help in greater amount of transparency and disclosure on the part of the developers.
With all these positive measures, the industry would professionalise itself with the consumer being the biggest beneficiary in the long run.
RAMESH NAIR
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