India had a minuscule amount of ‘institutional quality’ in existing real estate, and FDI was only permitted in development projects (except hotels). The result: all the FDI went to developers with FDI-compliant projects on the drawing board. Public markets also got into the act in 2006. Sensing the availability of capital, some large and sophisticated developers went directly to loosely regulated markets such as London’s Alternative Investment Market (AIM) and raised capital.
The Indian real estate story was heard around the globe. The money raised transformed the Indian developers’ caution into over-confidence. The resulting rise in prices of land and finished products over the past 2-3 years has been unprecedented. SEZ-related land acquisitions, eye-popping IPO valuations of real estate companies and poor farmers turning into crorepatis overnight have fuelled land value across the country. There is no data stating that FDI is responsible, but it affected the overall sentiment of the sector.
Today — as AIM and the Indian public market are shut for the time being, and the government and RBI tighten norms on availability of debt — private equity remains the most reliable source of capital. In the past two years, the newly-arrived funds were chasing the developers. At a conference in Mumbai last November, foreign investors outnumbered Indian developers 4:1. Many were intermediaries posing as investors. REITs came to mean real estate investment tourists who stay in hotels, issue MOUs and leave, never to be seen again. Looking ahead, the playing field will be more even. Developers that are transparent in their practices will attract more private equity funds. Not all funds are run by seasoned investment professionals, and the market will start to appreciate the difference over time.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.