Consumers in the real-estate sector may complain about increasing interest rates and property prices going out of reach. And developers may complain about increasing costs, tightening fund flow and a slowdown in the market. But private equity funds still find enough scope in the market for high returns on their investments in real-estate projects and are optimistic in their forecast over the next few years.

Private equity funds target post-tax returns of 25-30 per cent, and find no cause to worry over the perceived slowdown in the real-estate sector. With their investment based on a three-five year prospect for a project — the duration for which they stay with a project before exiting — the fluctuations in the short term are not a major cause for concern.

The reasons for their optimism are: the fundamental strength in the economy, which they see is continuously growing, investments are happening across the sectors, people are making money enough to invest in a house and there is still a basic demand for housing that has to be met. No doubt, a segment of the market could put off its investment decision in the near term in the prevailing market situation but still that is bound to be corrected, feel those operating the funds.

This slowdown has only contributed to private equity funds becoming choosier about their projects. Real-estate companies in Mumbai, Pune and other metros have seen them pulling out of projects despite initial enthusiasm. But largely, private equity continues to see the Indian market as a major investment destination. Banks too are of a similar view on the market trends — no worries on a sustained drop in demand for home loans. What is a 50 basis point increase on a loan to fund a Rs 40-50 lakh apartment? Taken along with the overall slowdown in the real-estate sector, this hike may act as a dampener in the near term but is not strong enough to really hit demand, is the general feeling.

Therefore, developers and investors do not see the hike in interest rates or the prevailing slow sales as a major threat to demand in the medium term. As long as access to funds continues for the consumer, even if at a higher rate for some time to come, real-estate companies do not see the present situation as a threat to their bottom line. Or expect to see private equity funds lose their enthusiasm.

Access to funds — that is what private equity funds represent to developers who find them an attractive option despite the high and assured, guaranteed returns that such funds demand on their investments. There are not many more options that developers have that are cheaper.

Bank funds are available at about 14 per cent for funding construction costs. Despite their support for home loans, banks do not care for much exposure to real-estate projects, particularly in land acquisition. Private lenders can charge up to 30 per cent. So developers and private equity players do not see their relationship weakening, for now.

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