"The fund managers are not investing in companies whose business models are purely dependent on residential and commercial properties. Valuation was always a concern with this sector. Attempts were made in the past to bring in transparency, but questions about the future value of the landbanks and the logic applied to derive such value, still remain," said a top fund manager with a leading domestic mutual fund, which recently shed its real estate exposure.
He also admitted that fears of a real estate bubble negatively impacted the plans of fund houses to invest in real estate firms.
The bleak view of the domestic fund houses on real-estate companies was recently reflected during the initial public offering of DLF. The global funds rushed in to buy a bigger pie in the Delhi-property developer, which came out with India's biggest IPO of Rs 9,187 crore (Rs 91.87 billion) by selling 175 million shares.
The overall issue was subscribed by 3.47 times. While the qualified institutional investors' portion swelled 5.13 times, the mutual funds put in bids for a mere 14.5 million shares. However, the fund houses queued up for a larger stake in Vishal Retail, a growing midsegment retail chain, as they bid for 47.4 million shares, nearly four times their commitment to DLF.
"There has been a significant change in the real estate sector in the last few years. But the exposure of MFs to realty has not grown to that extent as concerns over valuations continue. Besides, the rising interest rates could also hamper the pure real-estate companies. But, we believe there are a few stocks which are reasonably valued," said a fund manager at ABN Amro Mutual Fund.
The fund house has a significant exposure to realty stock Unitech, which is among the top-five companies in its portfolio.
R Rajagopal, equity head of DBS Cholamandalam, said the fund's exposure to the sector could improve as more and more real estate companies get listed. The real-estate sector will see companies such as Housing Development and Infrastructure (Rs 1,400 crore or Rs 14 billion), Omaxe (Rs 1,400 crore or Rs 14 billion), IVR Urban Prime (Rs 200 crore or Rs 2 billion) and Kolte Patil (Rs 200 crore or Rs 2 billion) hitting the markets in the coming weeks.
"Real estate is seen as a sunrise industry. These stocks are volatile. Currently, their weightage in the S&P 500 may be around 1 per cent, which will go up as more companies get listed. Hence, despite concerns about valuation and business models, we are bullish on real estate," he said.
The fund house has around 5-6 per cent exposure to the sector.
IPO expert Prithvi Haldea recently said that the entry of DLF would open gateways for realty companies and the market could witness nearly 50 real estate IPOs in the next two years.
Sanjay Sinha, chief investment officer of SBI Mutual Fund said fund managers should take stock-specific calls, rather than being skeptical or bullish on the entire sector.
