PE players home in on mid-segment housing projects

Residential projects in the Rs 30-70 lakh range have caught investors’ fancy

MUMBAI: Here’s some respite from scorching property prices for the middle-class home-seeker. Private equity (PE) investors are now looking at investing only in residential projects priced between Rs 30 lakh and Rs 70 lakh.

Mid-segment projects are hard to imagine in Mumbai, where property prices are burning big holes in pockets. However, with PEs looking at investing in this segment, market dynamics may be ready for a change. According to Pranay Vakil, country head of global property consultant Knight Frank, home buyers are no longer interested in taking the risks they were taking earlier. “This is why the land component of the price is being controlled for developing these projects,” he said.

Knight Frank’s investment arm Rutley Capital Partners will invest $300 million in such projects. “We are keeping a tab on who needs the money and this fund will go to them,” Vakil said, adding that the company is looking at projects in Hyderabad, Bangalore, Visakhapatnam and Mumbai suburbs.

In these projects, the land component would account for just 30-35% of the sale price because cost fluctuations are caused more by land prices than by construction and labour charges. “In the Rs 35-70 lakh bracket, you can get a two or three bedroom-hall-kitchen apartment covering 1,200 sq ft in Mumbai suburbs. Here, the price of land would be about Rs 2,000 per sq ft and the end price would be Rs 5,000 a sq ft. This makes the project feasible for both the buyer and the seller,” Vakil said.

Red Fort Capital, an international real estate PE player, has earmarked Rs 3,500 crore for the Indian real estate market. According to the company’s director Kuldip Chawlla, as much as 50% of this would be in the residential space. “We are calling developers to build mid-segment projects on our land bank,” Chawlla said.

Then there’s Nirmal Lifestyle, which recently announced Lifestyle City Township projects in suburban Mumbai and Pune. The Mumbai projects would be priced between Rs 30 lakh and Rs 60 lakh while in Pune, luxury homes would cost as much as Rs 1 crore.

Nirmal Lifestyle chairman Dharmesh Jain said it’s easy to get PE investment for projects in this range. “Customers are readily available for these projects. We are looking at greater PE investment once construction for the first project begins in the third quarter of 2008,” Jain said. The Anand Jain-promoted Urban Infrastructure Opportunities Fund too has invested $50 million in projects in Dombivli and Kalyan.

This segment is also benefiting from the correction that seems to have begun in the Indian real estate market.
 
According to Anuj Puri, country head of real estate money management and services firm Jones Lang LaSalle Meghraj, land prices have dipped in several parts of India. “Mumbai has seen a 15% correction. Places like Mohali in Punjab have seen land prices go down by 50% and even Bangalore has seen a dip of more than 25%. PE investors are becoming wary as the market isn’t performing as well as they had expected it to,” he said.
 
Puri added that these players would have  to wait for at least three years before they see returns on their investments. “They do have liquidity but they haven’t been able to find the right partners,” Puri said. According to Anshuman Magazine, chairman and managing director (South Asia) of real estate consultancy CB Richard Ellis, PE investors are insisting on these projects because the demand is high. “The Indian real estate market hasn’t fallen badly. It has just stabilised and matured. This means investors now know what to expect from this market and where the exact demand lies,” he said.

Bigger developers, however, are shying away from such projects due to low profit margins. A top Mumbai developer said that there are two reasons why big players are not touching this range. “First, we will have to sell our existing projects at lower rates. Second, such investors are sceptical about high-end projects. So they push developers to do mid-priced housing projects which are difficult in a place like Mumbai,” the developer said.

But others have taken the plunge without a hesitation. Infinite India, a real estate-centric investment fund backed by JM Financial, is now looking only at this market. From its $400 million fund, the company had invested Rs 200 crore in two Shrachi India projects in Kolkata. In the next nine months, the balance would go into mid-segment projects in Kochi, Trivandrum and Mumbai, where the demand is high, a senior official in the company said.

Puri of Jones Lang LaSalle Meghraj felt that the trend would “separate the men from the boys”. “Only the tough would survive because it won’t be easy to build mid-segment residential projects in Mumbai and Tier II cities. But in the long run, this business would profit more than any other,” he said.

pooja_s@dnaindia.net