The investors who are comprised of property and private equity funds from affluent savers all across the world to invest in the real-estate market in India which saw a surge in between 2005 to 2008. With more than five to seven billion or even more spent in this sector many property developers are looking for an exit as they were promised double-digit returns during the years of the real-estate boom.
The Indian partners had promised these companies who stepped
in as joint ventures that they will acquire cheap labour, the partners were
promised quick clearances and ready buyers from the Indian partners. But this
was not completely true as there were many delays in approvals, cost
escalation, softening property prices and picky buyers, the cycle of projects
have stretched well beyond the life cycle of funds.
Many real-estate developers find themselves in a situation where
a prominent Bangalore property developer is going through, he is stuck with 170
acres of land which is jointly owned with a private equity fund and because of
this he is unable to buy out from the fund nor it can attract new investors
about the bankability of a new project-be it commercial space or office space. But
as in all these markets, you do find new investors like sharks ready to pounce
on a distressed buyer by offering a beaten down price.
When it comes to refinancing of these transactions there has
been a spree. They are selling a sizeable holding of their stake to other
private equity funds, in rare cases the partners are lending from Indian
non-banking finance companies, banks and large Indian business corporations to
buy out their joint venture with those partners. Bank loans are generally
granted where the risk is less when the venture is complete and most apartments
are sold to buyers. Non-banking institutions grant credit by issuing non-convertible
debentures given by the borrower who has to fork out 15-19% interest.
There has been a flurry of projects in the mid, lower and
affordable segments and not in luxury projects which was once the pinnacle of
real-estate, and it is from that segment where most developers are trying to
bail out off.
So what will be the outcome when new investors come in? A few Chinese funds announced deal would be at
a discount, it is the reason why the prices of real-estate are unlikely to go
up in a hurry. Prices may remain the same in the metropolitan cities but not
everywhere. With the new law issued by the Central Government mentioning the
real-estate developers should complete the projects on time to avoid a penalty,
this would mean the prices would be slashed to increase supply in the
short-term. If the market takes a long time to pick up then another set of
investors would be left with burnt fingers.
