Real estate investments likely to fall

Private equity players investing in the real estate market may not be a happy lot, with abundant commercial and residential supply likely to hit the market in 2007, as returns on real estate investments are likely to fall, reports CNBC-TV18.

The lucrative real estate market may not remain as profitable for private equity investors or developers as it has been in the past two years. The higher dividend distribution tax and the 12.36% service tax on commercial rents imposed by the Budget will eat into returns of investors. This comes on top of surging land prices, which have sharply reduced the margins of developers.

"There is too much liquidity foreign funds chasing the limited land supply so automatically the prices of land are very high and as a result of high land prices returns or margins of developers, investors, private equity players have fallen drastically" says Subodh Runwal, Managing Director, Runwal Group.

On the other hand a slew of developed projects are likely to flood the market this year. Realty consultants Cushman and Wakefield projects that business hubs like Bangalore will add 16 million sq feet of developed office space, Chennai will another 12 million sq feet, Delhi and the NCR region will see 10.5 million square feet of new office space and the commercial capital Mumbai will see 9.1 million square feet entering the market. Though nearly 40% of this office space is estimated to have been already pre leased to tenant, developers expect prices to fall with so much supply entering the market.

Rupee returns is expected to be 15 to 20%, which is lot more than what is expected from markets like Australia or Europe. So people will get returns of 15 to 20% not euphoric returns of 30% about which we have talked earlier,” adds Pranay Vakil, Chairman, Knight Frank

The other factors that are likely to impact investor returns are raising construction costs for developers and also higher interest rates for genuine homebuyers, which may dampen buying sentiment. These will also contribute to the correction in real estate prices

Experts say that though private equity investors are unlikely to flee the Indian real estate market they will certainly re-examine their investments in India. Nearly USD 17 billion is waiting to enter the market, but all of it may not come in.