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Economy Nov 20, 2012

Seven trends to look out for in real estate in 2013

By Ramesh Nair

Here are the seven things that buyers should watch out for in 2013

Seller-buyer price difference to reduce, more liquidity in housing sector in 2013

In 2013, the availability of debt capital is likely to increase while the flow of equity capital will remain more or less stable. The seller buyer price difference for a property will reduce, increasing overall transaction volume.

New guidelines for non-banking housing finance corporations to assist in pushing funding for the housing sector in 2013. There will be more liquidity available in the housing finance market as rules for raising external commercial borrowings will be relaxed for HFCs, and with market regulator Sebi allowing debt funds to invest an additional 10% in HFCs. HFCs will also look at tapping the QIP market to raise funds in 2013.

Investors will focus more on transparency, governance and liquidity before investing.

Investment periods of funds will reduce from 5 years to 4 years.

Given the on-going challenges that the Indian real estate sector faces on these fronts, even fewer development companies will be successful on the public equity markets. Nevertheless, private equity deal ( in residential and the commercial space by both domestic and international funds) volumes will increase, and there will be more M&A activity within the PE industry.

PE Funds like to postpone exits to 2014; return expectations to reduce

A number of vintage funds from 2007-2008 will have to look at exiting in 2013, some of them at lower returns. Given the overall uncertainties, these funds would look at postponing their exits to 2014.

Insurance firms will start investing directly in low-risk, income producing office real estate. Investment bidders per property will increase, this time around with lower return expectations. Investment periods of funds will reduce from 5 years to 4 years.

Banks likely to start financing projects next year

In 2013, after a lull of two years, banks are likely to start offering construction finance to residential projects with approvals inorder to reduce delays in delivery and marketing risk. Approval timelines are a big uncertainty across India.

Banks will also become marginally more flexible on interest rates, collaterals, loan-to-values ( the ratio of a loan underwritten to a value of an asset purchased) and upfront fees. Established funds will get back into the fund raising mode after a 3-year hiatus.

Builders with longer operating history will find it easier to raise funds

As before, developers with longer operating history such as Oberoi, Shobha and Prestige who have managed growth effectively over the years and predictability of income will find it easier to raise funds in 2013. It is unlikely that any major player will venture out nationally, with the accent for 2013 remaining firmly on local expansion. Also, we will see developers focusing more on joint ventures with landlords rather than on buying land.

PE funds to focus on growth areas in Tier I cities

In 2013, we will see most PE deals being structured to give the investor the first preference to cash flows. Most real estate PE investments will be focused on Tier I cities like Mumbai, NCR, Bangalore, Chennai and Kolkata. Funds with a good track record that have a strategy to target a narrow asset class within specific locations such as last mile funding for residential under construction projects in Tier 1 cities and having strong delivery teams will be able to raise funds more easily. Regulatory authorities will increase their scrutiny of private fund raising offerings and closely monitor if the funds raised by the companies are being used for stated objectives.

Private Equity funds will raise distressed real estate funds and adopt a conservative cash-flow investment model

Internationally, funds buying bank NPA portfolios is common by setting up specialized funds. The concept will catch up in India too. A number of new domestic real estate PE funds backed by corporate entities are likely to be launched in 2013. Also, large family offices will now begin creating dedicated real estate teams.

Many more funds will adopt a conservative cash flow-driven investment approach and focus on investing in income producing office assets, with an accent on asset repositioning, refinancing and refurbishment.

by Ramesh Nair

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