PEs rake in money from realty amid slowdown

Amid the perception of gloom and doom in the Indian property market, here's something to cheer about. The real estate industry has given 1.21 times, or  20 per cent, average returns to private equity (PE) investors in the past four years, compared to the global average of 0.8 times.

Mumbai and Kolkata, with returns of 1.4 and 1.3 times, respectively, were the top performers, said a report by global property consultant Jones Lang LaSalle (JLL).

"A 20 per cent return is a good number, if you look at the property markets between 2008 and 2011, which were not the best of the markets. When the world has not made any money in real estate in the past couple of years, it's time to cheer," said Sunil Rohokale, managing director and chief executive of ASK Investment Holdings, which manages property funds in India.

"When stock markets have lost more than 20 per cent in the past one year, I think returns from real estate are far superior."

JLL chairman Anuj Puri said, "India has given 50 per cent better returns than the global average." He said the reason was land prices in India were going up, while in other countries, these were not.

The Bombay Stock Exchange's Sensex has fallen 23.52 per cent since the beginning of the year, eroding much of investors' wealth.

Property sale registrations have hit a 31-month low in Mumbai due to high realty prices and mortgage rates. Sale registrations for November were down 20 per cent to 4,060 units year-on-year and down 12 per cent month-on-month, according to data culled by equity brokerage Prabhudas Lilladher.

V Hari Krishna, director, Kotak Realty Fund, believes it was just an average of returns made by different investors in real estate.

"A lot of people have lots of money. Many have made a lot of money also. For instance, our returns are way above the 1.2x

returns," Krishna said. Kotak Realty had made returns of 1.8x in the past couple of years, he said.

Early this year, Kotak exited city-based Peepul Tree Properties by selling its investment to Tata Realty for Rs 385 crore (Rs 3.85 billion), thus making four times returns from its Rs 95-crore initial investment.

According to the report by JLL, among different asset classes, land has given the highest return of 5.1 times, followed by hotels (1.8x) and industrial (1.6x).

The commercial sector has given returns of 1.2 times, while residential has given returns of 1.1x.

"Buying land and aggregating is a high-risk activity, as it involves a lot of rules, regulations and complexities. Returns from land look better than development returns for this reason," said Rohokale of ASK Investment Holdings. "And, the same explains better returns from commercial real estate, which has higher risks than residential."

The report said the Indian real estate sector had seen exit of $3 billion (nearly Rs 15,900 crore) worth investments by PE investors in the past four years. Mumbai has seen exits of $1.16 billion, followed by the national capital region ($0.86 billion).

Going ahead, property fund managers would not be able to make 20 per cent plus returns in India, given the state of property sales, said JLL's Puri. "I think the maximum it will be high teens."

According to the report, 65 per cent of PE exits have been profitable and the remaining have not made money.

In terms of number of exits, both domestic and foreign investors have equal share, while in terms of value, foreign investors have a 72 per cent share, as the average ticket size of offshore investors has been three times the deal size of domestic investors.

"In 2012 and 2013, we should see more exits, as the life of many funds comes to an end. It's good news for the industry," said Rohokale.