Pooja Meswani
Indian real estate has become hot property for investors worldwide. A report by Jones Lang LaSalle says the foreign investment in this sector is already in excess of $3 billion. The FDI norms for the real estate sector were relaxed about two years ago. But it is not only foreign investors who have poured in funds into the sector, a number of realty funds have raised money from domestic investors as well. Rough calculations by BW show that over $6 billion worth of funds have been raised in the recent past. By end-2007, another $8 billion-10 billion is expected to enter this sector, say analysts. The deluge of funds is sure to change the face of the industry.
Among the funds meant solely for foreign investors, the Hiranandani-promoted Hirco raised as much as $753 million in December 2006, Sun-Apollo India Real Estate Fund generated $630 million and Unitech Corporate Parks collected more than $700 million late last year.
“It is an opportunistic investment, as Indian real estate offers better returns than similar markets such as Brazil and Russia,” says Mridul Upreti, associate director and head (capital markets), Jones Lang LaSalle. A study by Knight Frank India says that private equity (PE) funds are expecting returns ranging between 15 and 30 per cent per annum from Indian real estate. The high expected rate of return comes from the high expected demand from varied sectors in the economy.
Organised retail, for instance, is growing at 30 per cent a year. Also, companies from sectors such as automobiles are setting up manufacturing hubs leading to more demand for commercial space. Analysts say the success of IT/ITeS sectors is gradually extending to the broader economy, and it will slowly result in a robust commercial as well as residential real estate sector with more diversified investment opportunities.
Foreign Exchange Listings
A number of realty funds have been listed on the Alternative Investment Market (AIM), the London Stock Exchange’s international market, and pan-European exchange Euronext. AIM listings have already raised more than $2 billion since November last year.
So, why take the AIM route? According to George Mathew, senior vice-president, Edelweiss Capital, AIM is gaining in popularity as it allows the listing of the equity of a pool of assets with attractive equity costs. Besides, an AIM float offers access to a wide pool of capital and all-ows foreign investors to invest in Indian properties with the comfort of offloading their investments at any time by just selling shares on the exchange. Says Harvesp Mehta, national director (investments) Knight Frank India: “There are not too many norms laid down by the regulator for an AIM listing. It is regulated more by market forces such as price, type of asset and developers.”
A case in point is Indiabulls’ Dev Property Development Fund, which had planned to raise more than $500 million on AIM, but its issue size was halved to $270 million. Says Mehta: “Fund raising is directly proportional to the quality of projects shown in the pipeline to potential investors.” Dev Property’s funds were meant to pick up minority stakes in three properties being developed by Indiabulls. Upreti adds that investor fatigue may have developed with AIM listings, also considering that it is not a very liquid market.
To be sure, many realty funds targeted at the Indian market are trading at a discount to their issue price (see ‘Not Everything’s Hu-nky-dory’). Ajoy Veer Kapoor, founder of Yatra Capital, says the initial investor base included hedge funds, whose selling decisions are not necessarily based on changes in fundamentals of businesses, but mainly on other macro factors.
But as things stand, Dev Development Fund’s is a one-off case. In fact, the fund-raising spree has been strong even in the domestic market. Many Indian players have locally raised nearly $2 billion in the past two years.
The Indian IPO Story
“At present, real estate firms account for 2.5-3.5 per cent of the aggregate market capitalisation,” says Suman Saha, associate director and co-head (equity product group), Kotak Mahindra Capital. “There are many firms planning to raise money through Indian IPOs. Thus, the share of real estate in the overall market capitalisation could potentially double from current levels by end-2007.” Apart from the DLF IPO, sources say, Dheeraj Group, Kumar Builders, Delhi-based MRNGF and many South India-based and Mumbai-based players will launch IPOs the in next 2-3 months.
Home-grown PE realty funds such as Kshitij Venture Capital and Horizon International Fund, backed by Pantaloon Retail Group, have already raised more than $400 million to invest in retail-oriented real estate development.
What Lies Ahead?
The pertinent question at this point is, how will this deluge of funds change the real estate sector? Kapoor says that institutional money will make the industry much more organised. Adds Mehta: “Funds coming to India look at appropriate and efficient routes.” He sees funds coming in larger quantities and possibly through these routes only. Funds have also started investing in infrastructure development as infrastructure is a constraint and may hamper growth of real estate to some extent. If opportunities are rightly identified, it will boost real estate. As Edelweiss’s Mathew says: “Private equity investments in real estate will also need to be complemented by investments in infrastructure creation. It should also support redevelopment of metros along with growth of tier-II and tier-III cities.”
Yet, experts say that the unabated rush of capital may not continue for long. As mentioned earlier, expected returns are currently high because demand for quality commercial space is outstripping supply. But current investments are being deployed in developing land, which will ultimately turn into actual supply in 2-3 years. Mathew says that once supply stabilises, investments in the sector will taper out.
