With direct retail demand flagging and high interest rates inhibiting access to cash, real estate developers are turning to new ways of funding and more attractive development opportunities.
As far as the first goes, there has been little switching cost to developers, so far, as PE firms and sovereign wealth funds flush with oil money are looking at the Indian real estate market as opportunistic investment. Despite, all indications of potential coupling with US markets, and expectations of further corrections in the Indian stock market, most expect the property markets to remain unaffected and still attractively valued especially outside Mumbai. Increasing transparency in the real estate market and ease for foreign investors in acquiring stakes has only added to this attraction, it seems.
The most recent such investment came from Dubai's Pan Atlantic LLC, which, recently bought a 40% stake in an upcoming Bangalore project developed by Sobha Developer Ltd. Sobha plans to develop a 1.7-million-sq ft residential township at the plot in south Bangalore with construction expected to start next quarter.
It remains to be seen, if the recent corrections in the property markets themselves will be a precursor to further revaluations as was the case in stock markets and scare away these new investors (Here is more analysis on the topic). However, in the mean time, funds flush with money and looking for more venues outside of the traditional capital markets are still a source of solace for developers who have already put down money for their projects. It will be interesting to see the actual terms of the deal and how high a cost, developers will have to pay going forward for such alternate funding.
Urban developers are also looking to expand on their portfolio by branching out into the hospitality industry. The above mentioned Sobha Developers is just one of these opportunistic developers. Real estate companies such as Brigade group, Omaxe Ltd, Prestige group, Sobha Developers Ltd and Value Designbuild Pvt. Ltd, are entering into the leisure segment to build health resorts and spas in the backwaters of Kerala or amid the plantations of Chikmagalur in Karnataka.
India's rising economic capital has increased interest and profit potential for resorts and spas developed in easy commuting distance from major cities. Adding to that, the country's reputation for providing world class medical procedures at a fraction of the cost (compared to US and Europe) has seen an increasing trend in medical tourism with major hospitals forging ties with the hospitality industry to provide a better holistic experience.
While such diversification is potentially inevitable for developers, it is questionable if this is the right time. Such resorts have longer break even time and with increasing costs of funding, they may not be the best investment venue for independent developers currently.
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