Mumbai: The money flow to the domestic real estate market may be narrowed due to tough lending norms, an unfavourable primary market and subprime woes. According to industry experts, these factors may affect slowing down real estate deals and fancy valuations projected by developers witnessing deep correction.

Sourav Goswami, managing director of Walton Street Capital India, a leading US based real estate fund, said, “Our recent experience is that valuation expectations for deals have moderated. Developers have been increasingly willing to negotiate on terms and conditions, including controls, percentage of divestment and valuations, for SPV-level investments.”

Given the investor apathy for IPOs, developers may have to knock the doors of private equity (PE) investors.

“On a fair valuations, the PE firms are keen to struck deal with the developers. Properties with clear titles, right location and time of delivery are the crucial parameters of the PE funds. If these terms met, valuations may not a issue,” said Nitesh Estates chairman Nitesh Shetty. In the past two years, Nitesh Estates had struck three large scale PE deals.

Balaji Rao, India head of Starwood Capital, one of the largest real estate and hospitality fund in the US, said, “Global uncertainty on the capital flows would also have its impact on the investment scenario in the Indian market. This would in turn affect deal values and values in the real estate sector in the short term attest.”

Asking banks to ensure that credit disbursed is used only for “productive construction activity, the Reserve Bank of India (RBI) had stiffened the lending norms to the real estate sector last year. RBI has been highly reactive to banks’ real estate exposures for over two years now as property prices surged. Developers are now left with two options : IPOs and PEs. The first one is now drying out.

According to bankers, many leading overseas financial institutions having bitter experiences in the subprime fiasco, are now moving cautiously in India. This has made many large investors to cut down their exposure in the Indian real estate market the medium term.

A Mumbai-based i-banker said, “The investors in the property market— especially the giants such as Citi and Deutsche Bank, are treading carefully. The valuations have definitely taken a plunge, helping private equity investors to struck deal with better valuations.”

The investors are now concentrating on corporate financing, and may be averse to funding special purpose vehicles (SPV). A banking source said, “Only the best property projects will be successful in garnering investments.”

However, Mr Goswami, said, “Issues related to the subprime crisis in the western economies are still playing out in the marketplace. The linkage to how it will impact India, aside from possible psychological wariness of emerging markets, is unclear as the major banks which have been affected have not lent in the same manner in India. For them the Indian real estate story has been much more of an equity or quasi-equity play, with little direct debt exposure; and even then, the debt generally has had substantial protection.”

According to some bankers, India still looks comfortable in its future prospects. A merchant banker said, “With developed markets having turned extremely volatile after the subprime meltdown, a few markets such as India, Russia, Turkey and east European countries have become better destinations.”

Mukesh Patel, promoter, Neelkanth Group, reckons that the industry is more dynamic and has shown more vibrancy as compared to any other sector. Patel said, "If prior to the country's economic liberalisation sectors such as telecom had only two players, there are now 10-12 companies only. In real estate more than 200 noticeable developers have emerged who have made their mark regionally. Most of these companies are slowly getting corporate governance in their organisation as they look for funding options."

After IPOs, foreign money has done wonders to the industry. According to Jagdish Chandra Sharma, MD, Sobha Developers, The industry, though still in formative years, is one of the most rapidly maturing sectors in the economy.

In the past two years, the number of companies listed in stock exchanges has dramatically gone up. Few of the biggest IPOs in recent time have been of real estate companies; for instance DLF. In fact, it is so well represented on the stock exchange that Bombay Stock Exchange recently started Realty Index.