News: Foreign realty funds in India surge to $10 bn

(BS 07/07/2006) Mumbai - Overseas funds outweigh domestic ones as Asia lures foreign investors with its potential.

Foreign realty funds worth approximately $10 billion have been incorporated since the relaxation of the foreign direct investment norms in the sector last February, according to the estimates provided by real estate consultants Cushman&Wakefield.

In the same time period, many domestic realty funds have also been set up, raising approximately $4.5 billion.

Last February, the government allowed 100 per cent FDI in the construction and had reduced the minimum land parcel from 100 acres to 25 acres. Foreign investment was also allowed in greenfield/brownfield developments.

Sanjay Verma, joint managing director, Cushman&Wakefield said $2 billion from domestic and foreign funds has already been committed to various projects.

Given the unprecedented growth in real estate development, there is a huge equity component required by developers, which cannot be met by in-house funds. This is why many developers are opting for funds.

Foreign investors are opting for the fund-in-fund route, with either other established foreign funds or by subscribing to the dollar component of domestic Indian funds. The latter had raised over $1 billion in the first year of the opening of foreign investment in real estate.

Verma said foreign funds outweigh the domestic funds as Asia, particularly India and China, attracts foreign investors with its future potential and longevity.

Returns on these funds cannot be generalised, as this is contingent on asset classes and risk appetite of investors.

While the normal route for these funds would be four to five years, the advent of mutual funds in real estate and REITS have defined another route. "Private equity investors would be able to sell their holdings to the mutual funds on completion of the project," said Verma.

Some funds may even go for an initial public offering, whereby a holding company of its various projects could be listed. The $80 million Kshitij and $350 million Horizon realty funds are expected to opt for this fund.

There is a requirement of a debt component for any private equity to generate desirable results, said Verma. He added that there is a need to make this component even more dynamic.