The recent investments range across the country. Morgan Stanley’s PE arm invested $90 million (Rs 499.4 crore) in group housing in Mumbai, while Red Fort Capital put $30 million in similar projects in the National Capital Region. Projects in Bangalore are popular, as demand has risen.

“The buzz around real estate may be missing, but the demand for expensive homes in Mumbai is still strong,” says Kamal Khetan, managing director of Mumbai-based Sunteck Realty, which received Rs 310 crore from Kotak Private Equity last year.

Adds an analyst with a foreign brokerage: “If the Reserve Bank of India [RBI] ever reduces interest rates, real estate stock will be super charged as it will bring down their debt.” Though the RBI is unlikely to restructure the sector’s loans, word on the street is that interest rates won’t rise much. That puts a cap on the interest outgo of these companies.

Realty companies are now trying to get their finances in order so that they can attract more investment. Unitech, which had debts of Rs 5,100 crore in the fourth quarter of FY12, managed to repay some of it from internal accruals. DLF sold several assets to pare its debt. Bangalore-based Sobha Developers repaid Rs 732 crore of its Rs 1,144 crore outstanding loans last year.

Between January and March 2012, PE firms invested Rs 2,100 crore in real estate companies, double what they pumped in during the same period last year. Average deal sizes were Rs 190 crore against Rs 80 crore last year, according to real estate advisory Cushman & Wakefield.

Companies in this space are desperate for cash to reduce debt or complete projects, but banks see them as bad risks. However, PE firms are looking on the bright side; valuations are low, and, according to data from the Centre for Monitoring Indian Economy, only one of the eight large realty firms reported a loss in 2011-12. In an attempt to hedge their bets, PE firms are not taking stakes in real estate companies; investors such as Baring Private Equity Partners India are deploying funds in commercial platforms with recurring rental income.

According to a FY12 report by real estate consultancy Knight Frank India, developers in Mumbai released 40% less units than last year, as there was already an inventory of 80,000 units.

The reason, say analysts, is that the valuations of these companies were low, making them attractive to private equity (PE) firms. On the face of it, investing in a troubled sector doesn’t seem like the smartest move. And real estate is definitely troubled—high debt, piled-up inventory, and depressed market conditions have kept prices soft.

THE UPWARD CYCLE FOR residential construction companies looks like it may not be confined to the U.S. Late last year, share prices of India’s top realty companies DLF and Unitech were trading at close to their 52-week lows. By February this year, prices went up by 50%; Unitech, which touched a low of Rs 17.5 in December, hit a peak of Rs 35.5 two months later. It now trades at Rs 22.

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