Kotak Realty Funds is raising $350 million for property joint venture projects in India and to take stakes in developers, who are seeing their funding sources narrow. Chief Investment Officer Hari Krishna, who has already invested a $100 million fund raised domestically, said the new 7-year fund would close next month.

The unit of India's Kotak Mahindra Bank hopes to attract pension funds and other institutional investors, mostly from Europe, with a internal rate of return target of around 25 percent. "They need to juice up their returns," Krishna said of the willingness of investors to dabble in relatively high-risk Indian property.

Speaking on the sidelines of a conference in Mumbai, Krishna said he was looking to take equity stakes in developers and exit through initial public offerings in three or four years time. Kotak's first fund joined private equity group Warburg Pincus by taking a $10 million stake Lemontree Hotels, a new firm that is building business hotels across India.

The tactic has also been pursued by the property arm of U.S. investment bank Morgan Stanley, which has bought into three small Indian developers in the hope of making them national players. Indian developers are itching to accumulate land and build at a time when the property market is booming -- to such an extent that many in the industry think a sharp correction is around the corner -- but most are struggling to raise funds.

Initial public offerings have become a drawn out process as regulators pick through applications in response to criticisms that firms are overvaluing their land. And the valuation issue has hit performances by recent debutants such as Mumbai-listed Akruti Nirman Ltd. and Dev Property Development, which listed on London's Alternative Investment Market in January.
Slowing residential sales in some cities were also squeezing cash flow, Krishna said. And at a time when the central bank is trying to clamp down on lending for property projects to try to cool the sector, commercial banks would lend to only the best recognised names in the country. Lending for land purchases is banned. "Debt financing is increasingly to only those with a strong equity base, so you have to get that equity base on board," he said of the attraction of local developers to foreign capital.

Krishna said many investors were questioning whether investing in India was worth the risk, considering property deals in safer Japan and Australia could give internal rates of returns in the late teens. In a real estate transparency index drawn up by consultants Jones Lang LaSalle, India is labeled "semi-transparent" and scores just below Thailand and just above "low" China. Investors are most worried by unclear land titles, corruption and red tape, but they still pour money into the country. Last year, an estimated $10 billion was raised internationally for Indian property. "There is a certain positive sentiment for India at this time, but the window is not necessarily going to be open forever," Krishna said.
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