India's real estate party may be cooling down rapidly. Global private equity firms say that they would rather invest in the US realty market than in the Indian one because US property prices have fallen so sharply that yields on investments there will be more attractive--without the hassle.
Private equity firms made a beeline for India after the government allowed foreign direct investment in real estate in 2005. They were attracted by returns of 25-30%, but with home prices falling in the US, global private equity firms now believe it makes more sense to park their investments in that country.

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"Last year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?" asked a senior executive at an international financial services group, who did not wish to be named.
Four out of six private equity funds Mint spoke to said they are no longer investing in India. They didn't want to be identified.

The US, reeling from a subprime lending crisis, is seeing the worst housing slump since the 1930s. The median price for a single-family home has dropped 7.7% in the first quarter of the year, the biggest decline in at least 29 years, as values tumbled in two out of every three US cities, according to the National Association of Realtors.

Sales of single-family houses and condominiums also fell 22% to 4.95 million at an annualized pace, the slowest in a decade.

"It is true that there are certain transactions in the US where you can get similar returns (as in India) of 25%, such as buying a condominium project or a commercial project," said Subhash Bedi, director at Red Fort Capital Advisors Ltd, a private equity firm. "When you can get similar returns in India and in the US, global private equity firms which have a mandate to invest anywhere in the world, will prefer the US market because there are lesser risks associated with investments there."

The Indian market is riskier to invest in because government approvals for projects here take a long time and there is also an execution risk because Indian developers do not have a history of completing projects on time, Bedi said.

Project delays can sometimes run to two to three years and there aren't enough laws in place to effectively protect investors. There is also no central registry of land titles in India, because land is a state subject and the system of record-keeping and rules vary from state to state, making investing compelling only if the returns are high. In the US, there is a central registry of titles and title insurance can be purchased to protect investors.