The real estate sector has been widely considered to be one of the major economic growth drivers of the country. However, with various concerns looming large over the industry in recent times, its growth has been hindered. Industry insiders feel that 2012 is going to be tough for most players as investors do not seems to be optimistic about the immediate prospects of the sector.
However, some positives have been coming out in terms of investment. India Infoline Venture Capital Fund (IIFL VCF), the venture capital arm of India’s leading financial services provider, announced that they have successfully completed IIFL Real Estate Fund (Domestic) Series 1 (the ‘Fund’) collecting Rs 500 crore in the process.
According to Balaji Raghavan, CEO and CIO of IIFL Alternate Asset Advisors Ltd, “We are highly encouraged by the response to the India Infoline group’s first real estate fund and successful foray into private equity. The corpus raised indicates the confidence investors have in our fund and the IIFL group in general. We will target deployment during the current year itself, focusing on leading and promising projects of top developers in major cities that are ongoing or to be launched. The target is to give Fund’s investors enhanced returns, backed by securities of quality assets and collaterals which have periodic cash flows.”
However, these are scattered instances. Industry analysts feel that it would take some more time for the sector to come out of the effects of sluggish demand, rising construction costs and higher equated monthly instalments (EMI) because of significantly higher interest rates offered by the banks. These concerns will continue to haunt the sector.
Rising bank interest rates
The Reserve Bank of India (RBI) has been almost regularly hiking repo and reverse repo rates in order to cope with inflationary pressures in the country. As a result, bank interest rates have gone up significantly. A report by Fitch says that RBI has continued with its trend of increasing the key interest rates in 2011. Home loan lenders were forced to discontinue with step-up interest rates due to pressure from RBI. Both these factors have led to an increase in EMIs.
Combined with this, construction processes have also been hit due to uncertainties in states that will undergo assembly elections. Investors are usually apprehensive about investing in states where there are chances of new governments being formed.
High debt and slowdown in demand in commercial and retail sector has therefore been the main reasons behind this sluggishness. Experts say that even though the demand for residential projects is high in many areas, there has been a correction in the overall demand owing to the slowdown of economy. Hence, the outlook remains cautious at the start of year. Moreover, Foreign direct investment and private equity funding has shrunk and a weak equity market no longer makes IPOs a viable funding option.
Investments in the retail real estate sector have also been sluggish. The IT and retail sectors have been going through a tough phase as the absorption in the commercial space has been low. However, experts feel that the situation will definitely improve in the next 6 months.