Sunday, June 08, 2008

Don't drag RE deals, close them fast....

As real estate prices take a tumble (industry players won’t openly admit though), PE investors commit routine mistakes. In the garb of expecting a higher IRR from their investments, they badger down RE entrepreneurs and their asset valuations. In effect, they delay deals.

So what’s the big deal? Is it not expected of them?

I disagree. This is the time when entrepreneurs are hard pressed for funds and deals can be closed fast at a steep discount as developers are desperate. Demand has certainly slumped but completed projects do find takers. Last year, PE players were signing deals at ridiculously high valuations and had no complaints. Now if they have to make up for their past sins, they have to sign a few deals at a discount and fast. Delaying deals would mean loss of opportunity since long term fundamentals haven't altered one bit going by large global commitments heading our way. Take the structured finance route (deals with in-built covenants for priority returns / higher preferred equity holdings to cover the downside risk of the investor if prices decline further) if necessary, but close deals fast. Wisdom demands closing deals sooner when inflation is high and prices take a tumble ; because even a marginal decline in inflation could drive prices back up.

Want to listen to some developer clamor? Here they go seeking tax exemptions for REITs in line with Mutual Fund units. But are we ready?

REITs would provide an early exit for PE investors in a RE project, but what’s left on the table for REIT investors? For a low down how REITs suit risk-averse retail investors in India, check here.

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