Beyond capital: Private equity and real estate development in India

PE firms have provided substantial capital for the growth of real estate in India. The opening of the real estate sector to FDI in 2005 has played a pivotal role in attracting such substantial capital. During the 2006-2010 period, real estate sector accounted for 34% of the total PE investments in India. Most of the PE investment was seen in large projects.23 Given the substantial economies of scale that are usually associated with construction industry, it is felt that development of such large projects could lead to a reduction in unit development costs, which can benefit the consumer. Investment in real estate requires not just investment skills but also familiarity and expertise with the real estate sector. Local know-how is a critical factor, as understanding of regulations and relationships are critical for obtaining the large number of approvals from different authorities at various stages of construction. Domestic PE firms and Dedicated RE funds bring in the element of familiarity with local conditions and sector expertise as compared to foreign PE firms and General Purpose funds. Dedicated RE funds make more diversified investments in all segments of real estate as compared to General Purpose funds. It was seen that domestic PE firms are more consistent in their investments as compared to foreign PE firms. Therefore, having a strong domestic PE industry and setting up more Dedicated RE funds can result in more-sustainable funding of real estate projects.