Indian realty from investment point of view in 2012

By: Sachin Sandhir, Managing Director, RICS, South Asia

Track2Realty: Amidst a global economic slowdown as a consequence of the US fiscal cliff and Eurozone debt crisis, India’s growth forecasts too have been revised downward over the last three quarters of the year.

Even in 2013, it is unlikely that we will see a spurt in growth given the existing inflationary pressures and large fiscal deficit which could adversely impact the scope for policy stimulus in the country. Specifically in the real estate sector, despite the opportunities, the prevailing global and local market conditions have affected investor sentiment.

The Indian realty market once a preferred and safe-high return investment option, is increasingly seeing vary investors, amid sluggish sales and an overall slowdown across property segments.

While India and several other developing markets such as Brazil, Russia and China continue to be attractive to investors, the truth of the matter is that qualified professionals in realty business, that can provide the requisite advice and quality standards are in fact ‘few and far between’ and this does not provide the much needed comfort sought by investors to park funds in these countries.

While there is no shortage of capital flow globally, what’s dictating the flow of money is the level of professionalism and international standards which India needs to improve and sustain in order to attract and retain investment. According to industry estimates, the country has received approximately $18 billion in investments over the last 7 years.

However, performance has not been very lucrative with exists worth $3.4 billion and an average multiple of 1.25. Even PE firms are now finding it difficult to raise capital from institutional and individual investors alike, as most funds are faltering on returns.

India hasn’t really delivered since 2005 on the promise that it held as an investment destination. With 20% internal returns promised by most PE funds in 2005-07, the current rate of return is only 8-10%, less than half of what the funds aimed to achieve. Additionally, several funds are finding it extremely difficult to exit their investments.

Even foreign direct investments (FDI) in real estate between April 2009 and December 2011 have declined by a drastic 92% and accounts for only 1.94% of the total FDI inflow. Such diminished returns are prompting international investors to stay clear of the market, therefore most of the capital finding its way into the sector today is really domestic capital.

Given the overall economic climate, coupled with the increased incidence of property prices, high interest rates and low sales, along with dismal corporate earnings growth, weak employment scenario in the sector and fluctuating rupee value are keeping investors at bay.

Even, funding avenues such IPOs, QIP and FDI which were being harnessed earlier have also started to dry up. Given the prevailing market conditions we are therefore, likely to see more structured deals where greater oversight and management from fund managers who have experienced investments across all stages of the property lifecycle.