India's real estate stocks are expensive following a sharp rally since March, making it hard for real estate funds to close deals, despite sitting on a pile of cash, a senior official at India's Kotak Realty Fund said.
The fund, a unit of Indian lender Kotak Mahindra Bank, said home prices have bottomed but office and retail space will see more pain as supply outstrips demand, its Director Vikas Chimakurthy, told a global real estate summit.
"We will not invest in a listed real estate company at these prices," said Chimakurthy, previously an investment banker at Kotak Mahindra Capital, the former Indian partner of Goldman Sachs.
The fund, which has not invested a majority of the $700 million (Dh2.5 billion) raised between 2005 and 2008, will instead focus on unlisted firms, he said.
"We believe that most of the listed real estate stocks are overpriced." Investors could be in for a rude jolt when real estate companies declare quarterly results, said Chimakurthy.
"For the current share prices to be justifiable the sales have to improve far more significantly," he said.
"Some large companies need to sell 300-500 apartments a month to justify these values, but are hardly selling 12-15."
Home buyers have started trickling back in key markets such as Mumbai and Delhi, emboldened by price cuts of as much as 40 per cent in some areas, helping developers battered as the global financial crisis cut off funding and demand vanished.
"The current situation of a nascent demand recovery, driven by lower pricing does not seem to suggest that a combination of high volumes and increased pricing can be a reality," said Nomura analyst Aatash Shah.
The return of some demand and a share price rally, catalysed largely by a decisive federal election verdict has boosted the share sale plans of cash-strapped real estate firms.
But there are concerns that developers will use money from share sales to replace debt only and not for projects that could help secure future sales growth.
"Most developers are not in growth mode at all. Most are trying to solve their existing problems which is to complete half-finished projects or reduce debt," said Chimakurthy.
"Had this exuberance not happened in real estate QIPs [qualified institutional placements] one would have seen some deals closed with private equity funds," Chimakurthy, who last closed a deal nearly a year ago, added.
India's real estate sector has seen just $90.7m worth of private equity deals so far this year compared with $376.7m in the same period in 2008, Thomson Reuters data shows.
In April, India's second-largest listed developer Unitech sold shares worth $325m to institutions, while founders of bigger rival DLF raised $780m by offloading 10 per cent. Indiabulls Real Estate sold shares worth $550m in May and at least nine more realty firms have got shareholder approval to sell shares worth more than $2bn, Thomson Reuters data showed.
Kotak is looking at several deals, mostly in the unlisted space, Chimakurthy said.
He declined to say when he expected to finalise a transaction but expected the valuation of projects to fall -- at least among unlisted firms that have limited funding options.
Chimakurthy said he expects huge supplies of commercial space over the next 12-18 months to hurt the segment.
Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here.