Friday Letter Unending demand

Anyone who thought fundraising for Indian real estate might cool in the second half of the year has had to think again. Recent weeks have witnessed a virtual monsoon of new private equity vehicles dedicated to Indian property blow into the market. Many of these are backed by foreign capital.  

Mumbai-based housing lender HDFC closed its first real estate fund for international investors. The firm raised $800 million (€587 million) from 28 foreign investors, making HDFC the largest private equity real estate player for the moment in India. Mumbai-based real estate fund Indiareit has said it would unveil a $750 million overseas fund by the end of the year. Reports in India indicate that the private equity arm of finance company IL&FS is close to launching a $1 billion Indian real estate fund while Actis Advisors is reportedly planning to launch its first India-dedicated fund with between $250 million and $300 million in dry powder, which will run alongside a $3 billion to $4 billion global fund that will have a $1 billion allocation for India.

Since India loosened its rules limiting foreign investment into the country’s real estate in 2005, India-focused private equity real estate funds have just gotten bigger and bigger. According to Indiareit, real estate funds focused on India have attracted about $3 billion so far, and the firm estimates that as much as $10 billion in overseas funds will be allocated to India in the coming two and a half years.

But compared to the mammoth amount of money being raised, actual investment activity in Indian real estate as distinct from infrastructure has been rather restrained. There have been some notable recent investments, such as Deutsche Bank Singapore’s involvement in acquiring a 25 percent stake in a special purpose vehicle owned by Mumbai-based developer Lodha Group for Rs 1,170 ($425 million: €298 million) to invest in three projects in Mumbai. But much of the capital earmarked for India has yet to be deployed.

While capital formation for Indian real estate investment has surged, deal activity is up only modestly. According to Dealogic, $771 million worth of targeted real estate M&A deals were completed in the first three quarters of this year, just a slight rise from the $468 million spent in the first three quarters of 2006. Unless the investment pace accelerates, the India fund managers are going to have a hard time justifying the increasing amounts of capital under management.

Some market observers are starting to question whether this level of inflow is sustainable in the face of the global credit crunch. Although the increasing trouble in the Western property markets could make opportunistic investors flee to the rosy outlook of India, the credit tightening could also make investors more risk averse.

Not everyone expects a global hiccup in the real estate finance market to have much of an effect on India. Aniruddha Joshi, executive vice president of Indian real estate investment company Hirco, says scramble for assets in India will likely continue unabated regardless of the activities of international players. He also said the fact that you can always borrow money locally makes India relatively immune to the wider squeeze.

These are good times indeed for owners of Indian property, but nervous times for people buying into this booming market.

PS: This item appears in the October edition of Private Equity Real Estate together with more news from Asia. Click here to subscribe.