American statesman Benjamin Franklin, in the best tradition of timeless aphorists, surely didn’t have private equity (PE) funds or the Indian real estate market in mind when he sagely uttered, “An investment in knowledge pays the best interest”. But he could well have been talking about them as I found out while working on this story: domestic real estate PE funds that invested with knowledge of the local property market made money; the rest are still trying to figure out what went wrong.
Look at the line-up: only domestic funds such as Kotak Realty Fund, Indiareit Fund Advisors, ASK Property Investment Advisors and HDFC Property Fund have made good money. Foreign PE funds such as Tishman Speyer, JP Morgan Chase and Lehman Brothers have made very little or no money. Why did some funds then, perform better than the others?
We have to go back to the heydays of 2005 to understand this, for that’s when the government first allowed 100% foreign direct investment (FDI) in the real estate sector via the automatic route. International and domestic PE funds couldn’t get into real estate fast enough back then. It was a mad rush characterised by investments in just about everything from townships to special economic zones (SEZs).
FDI in India’s superheated real estate market jumped 80 times from ₹171 crore in 2005 to ₹13,586 crore in 2010. Investments of foreign funds peaked in 2007, when they pumped in around $5.73 billion compared to $4.05 billion put in by domestic funds. The slowdown of 2008-09 was unexpected and ugly. Buyers backed off and projects that looked promising suddenly had no takers. The end result: many foreign funds got mired in delayed or unapproved projects, or into neck-deep arbitration with developers. For instance, the Indian arm of New York-based AIG Global Real Estate has sent a legal notice to Bengaluru-based real estate company RMZ Corp over an equal joint venture project in Hyderabad.
The bone of contention is AIG wants RMZ to exit the project because it has failed in developing it. AIG had invested ₹350 crore in the project, which got delayed because the joint venture partners could not agree over whether the project should be residential or mixed use. In the National Capital Region, Citi Property Investors (now owned by Apollo Global Management) and JP Morgan Chase & Co have filed separate arbitration proceed