Theres nothing stopping the ongoing slump in the real estate market. Analysts say land values and the selling price of real estate projects across the country are expected to slide further.

At the same time, investors are becoming more cautious in the face of the rising cost of money and growing market risks.

The high-risk scenario has resulted in private equity (PE) players increasing their internal rate of return (IRR) expectations from projects. A big PE player says its expectation are up from 20-25% about a year ago to around 25-30%.

The director of Investment Advisory, DTZ, a property advisory firm, Ambar Maheshwari , says that the expectations today are more towards structured deals.

There has been a correction in the market and the values are expected to go down further. So, most investors are safeguarding their interests by inking structured deals, explains Maheshwari. A number of deals are being structured in a way that the investor is entitled to a preferred or a priority return and even capital protection in some cases.

The chief investment officer at Kotak Realty Fund, V Hari Krishna, says The IRR expectations are more or less the same. The only difference is that people are more cautious on assumptions which were higher earlier compared to today (down at least 20-25%).

But he does agree that an apple to apple comparison would show that what was 25% earlier is about 28% today.
Even in structured deals, while earlier preferred equity was being capped at 18%, today it is about 22%. Starwood Capital Indias managing director Balaji Rao, says that from a market standpoint, the risk is higher today than a year ago. So, return expectations too will go up.

Of course the risk too depends on whom you are dealing with. A larger developers risk is comparatively lower than a smaller one. But it is also true that even with larger developers, the risk associated a year ago was lower than what it is today, adds Rao.

Agrees Parsvnath Developers chairman Pradeep Jain. It depends on the developer as well as the location of the project, perception of the project and the capability of the developer. We have execution capabilities, he says. In the case of new, smaller developers, the expectations from PEs might be higher but Parsvnath, he says, has done PE deals with comfortable numbers, at 14-17% IRR.

The developer though will always be optimistic about its product, while the investor will be cautious, says Maheshwari. On the side of the investor, since the valuations havent fallen as much as they would want them to, they want to underwrite deals with a higher IRR.

It is just a way of beating down valuations, he clarifies. So its just a case of a lower valuation or a structured deal.