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With the country’s real estate sector starting to look up post downturn, and equity markets scaling new highs, private equity (PE) firms have begun focusing on the property turf yet again. These days they are cherrypicking home and office space assets only.

Industry estimates suggests India Inc saw over 150 major deals in the first half of 2010. Of this, a little over 10 per cent were in the real estate sector alone. The current period has also seen a distinct rise in domestic real estate private equity funds, vis-a-vis mainly offshore real estate private equity capital in 2006 – early 2008.

Real estate consultancy firm, Jones Lang LaSalle chairman & country head Anuj Puri, said: “The PE firms expect a return of 20-25 per cent post tax — which is nearly the same as what they were before the downturn. The structure, however, has changed as the funds are looking more at capital protection — meaning lower risk even if that means slightly lower returns. Currently, the proportion is heavily skewed towards residential. This can be attributed to the fact that the residential sector is correctly seen as a self-liquidating asset class, while commercial and retail real estate have exit-related concerns due to unavailability of REIT/REMF (real estate mutual fund) vehicles in India.”

Niranjan Hiranandani, managing director of Hiranandani Constructions, seconds his views. He feels the focus is clearly on residential space and not retail and commercial. “Post downturn, the developer’s land bank is not the only criterion being weighed by PE firms for investing. They have begun concentrating on the project, its implementation process as well as on the overall performance of the real estate company and are expecting a return of 15-20 per cent per annum through their realty investments,” adds Hiranandani.

The real estate private equity investment market has become more focused in terms of geographies, asset class preference, deal structures, etc. “Institutional fixed income investments and domestic capital are trends which will emerge stronger going ahead. In short, there are distinct signals of a bottoming out of the investment activity curve and an uptake in activity in 2011,” said Vikram Hosangady, who is executive director of KPMG.

“It first seemed as though a majority of the PE funds were being channelled into the primary cities. However, it emerges that they have also chosen to invest into large residential projects in tier II cities, since they perceive that the demand for residential spaces in those cities is enough to justify quick absorption. In the end, what matters most is returns on investment,” said Manish Aggarwal, executive director, investment services (India), Cushman & Wakefield.

Hosangady feels the PE funds largely continues to focus on the top seven cities.