Global hedge funds, which are on the lookout for multi-fold returns on their investments, are slowly entering the booming domestic real estate sector.

Major hedge funds operating in the Indian property markets include Och-Ziff Capital (founded by hedge fund legend Dan Och), New Vernon Capital, Farallon Capital Management (the world’s largest single-manager hedge fund), Marathon Realty, DE Shaw and Tiger Global (a $1.4 billion hedge fund run by ex-principals of legendary trader Julian Robertson’s Tiger Management).

Hedge funds invest in the real estate sector through three routes, namely, through the purchase of equity stakes in listed/unlisted property developers, by direct participation in real estate projects or by putting a part of their funds into real estate funds floated for the Indian market, according to senior industry officials.

Though hedge funds do not have India-dedicated funds, they invest in the Indian market from their global or the Asia-Pacific funds.

According to industry estimates, about $1.6 billion private equity/hedge funds investments have been made in the real estate sector last year (Jan-Dec). It is expected to cross $2 billion this year.

Some of the hedge funds’ investments in India include New Vernon’s commitment of $250 million to the real estate sector from its $2 billion India-dedicated fund, DE Shaw’s $400 million investment in DLF Assets, which will develop SEZs across the country, Och-Ziff Capital’s 25 per cent stake acquisition in Nitesh Estates, a Bangalore-based real estate developer, for $51 million. Farallon has been a big investor in the Indiabulls Group, a big player in the property sector.

In several India-dedicated property funds raised globally in recent times, industry officials said hedge funds had invested significant amounts.

Horizon International Fund, the $350 million retail-focused real estate fund promoted by Kishore Biyani’s Future Group, has also seen investments by a couple of global hedge funds.

“Hedge funds have been very active in the Indian real estate market during the recent past. These funds had leveraged their balance sheet to deploy funds in the Indian real estate market. Because of the subprime turmoil, these leverages had put pressure on their balance sheet and so, to a certain extent, their interest towards the Indian real estate market has cooled off for the immediate term,” said Punit Malik, senior vice-president, head, realty and agri infrastructure banking, Yes Bank.

Adds Ganesh Raj, senior partner and head of real estate practice, Ernst & Young India, “This increasing interest by PEs into this segment is because of the rate of return (20-25 per cent), which no market can give anywhere in the world.”

Nearly two dozen US funds such as the Blackstone Group ($1 billion), Goldman Sachs ($1 billion), Citigroup Property Investors ($125 million), Morgan Stanley ($70 million) and GE Commercial Finance Real Estate ($63 million) are raising funds for investment in the Indian realty sector.

A CEO of one of the real estate funds in India said the hedge fund investments were coming in through the FDI route, which have strict lock-in clauses, and hence were long-term in nature.

“Investments are locked in and are long-term in nature. The FDI rules also allow investment in real estate developments, while it bars investments in vacant land. So, there is no concern of flipping of investments by hedge funds,” he said.

The government rules allow FDI up to 100 per cent under the automatic route in townships, housing, built-up infrastructure and construction development projects (which include housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).

Source: Business Standard
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