"Real estate developers face a double whammy of slowdown in the overall growth and hardening of interest rates, while the perceived risk-reward equation for India is going down," said S Sriniwasan, CEO, Kotak Real Estate Fund.
In a previous post, I had illustrated the effect of higher interest rates on returns. A related issue is the increase in return thresholds for India investments. In a landscape where US investors can buy money-good mortgage backed securities for 8-9% yield, the target return for an equity investment in Indian real estate will likely be in excess of 20%. Expect investors to be choosy with regard to transactions they pursue and inflexible when it comes to valuations for their chosen transactions. We are also likely to see more structured deals where the developer gets returns only after the private equity investor has reached a minimum level. Needless to say, none of these developments are good for the developer community.
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