1. real estate

Roundtable | India
Photography by Gautam Singh
(L to R) Subhash Bedi, Subramanian Sriniwasan, Khushru Jijina and Rajesh Jaggi
Of lions and tigers
India’s private real estate market has been
capital starved since a first wave of institutional
investors in the market found little success. PERE
hears from four surviving firms keen to ensure
returning investors don’t suffer a similar fate.
By Michelle Phillips
Roundtable | India
T
he monsoon rain and high tide are a deadly combination
in Mumbai. All around the distinctive One Indiabulls
Center office building where PERE is holding its inaugural India roundtable discussion, rain pounds the windows and
major roads flood. Somehow, all four participants have managed to find their way here. Each is glad to be in a dry place.
Despite the depressing weather, the roundtable is in good
voice. We have Kotak Realty Fund chief executive Subramanian Sriniwasan, Everstone Capital real estate managing partner Rajesh Jaggi, Red Fort Capital managing director Subhash Bedi, and Indiareit Fund Advisors managing director
Khushru Jijina. Perhaps because they are old acquaintances,
they quickly find comfort in one another’s company. Over the
course of the two-hour discussion it becomes evident they also
share similar thoughts on how to operate in India’s private real
estate market today.
Between 2005 and 2008, almost $14 billion was invested in
the country’s bricks and mortar, according to data provider
Venture Intelligence. Enchanted by India’s growth story, institution after institution committed capital and often to loosely
defined strategies. But when they yielded scant success, the
Indian property market’s place in the institutional investment
portfolio largely became marginalized, particularly by nondomestic sources of capital.
In response, these roundtablers are quick to agree the future
resides in demonstrating a clearer focus. Out go broad, allencompassing strategies. Instead a distinctive, strictly-defined
game plan is the tonic they believe will induce at least certain
investors to return to these shores. They cannot guarantee
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mistakes will not be repeated. But these men claim the firms
which have survived are now hands-on in approach and hyperfocused in strategy.
Stampede in, stampede out
Each roundtabler has operated through 2005 to 2008, when
30 percent IRR expectations were common; and to a greater
or lesser extent, each has the scars from what happened next.
“I think in many ways, 2005 to 2008 was really about venture capital investment in real estate,” Sriniwasan says. Most
institutions came to India with little or no experience of the
country’s real estate, and committed large sums of money to
managers and developers, who were equally in the dark about
institutional expectations, he says. According to PERE’s Research and Analytics Division, almost $24 billion was raised
in India for private equity real estate funds between 2005 and
2008, more than quadruple what has been raised since.
As Jijina sees things, Indian managers were unaccustomed
then to handling such large amounts of capital. “They had to set
up with developers who were actually doing smaller projects,
and suddenly these developers were bombarded with liquidity,” Jijina explains. Participants agreed that fund managers
and developers alike had taken on more capital than they could
handle. When $12 billion of foreign direct investment chased
about $3 billion worth of equity deals in India’s top five cities,
mistakes were bound to happen, Sriniwasan declares.
Replete with resources, there was less emphasis then on tight
investment parameters and mandates would include everything from residential to office to logistics, Sriniwasan says. Ji-
jina chimes in by describing “non-understanding” institutional
investors marrying with developers who were unacquainted
with working with private equity. “In those days, most developers didn’t know the difference between an SPV and an SUV,”
Sriniwasan responds, half-joking.
The years immediately following the start of the global financial crisis in 2008 were dark days indeed (see inflation and GDP
growth chart). Investors who had “lost their shirt” from their
forays stampeded out of Indian real estate as quickly as they
had stampeded in. In the course of just a year, roundtablers recall watching foreign capital dry up. The market’s reputation
took a battering in the process.
This is where Bedi chimes in: “The perception of India was
built by the LPs that invested in 2005 to 2008, [and] their voices
overshadow the one in 10 that stayed with it,” he says. “The
people who put out money then were still on the fence licking
their wounds as recently as a couple of years ago. They’re now
getting to a stage where they can acknowledge that mistakes
were made in terms of the managers or strategies or whatever.
They are ready to move on.”
A beautiful thing
Since the crisis started, managers still ambitious to succeed in
India claim to have learned too. The lesson for them, they confide, was in finding a focused strategy that is as robust as it is
attractive. It must be easily explained to investors too. For Everstone that meant tightening the remit to funds focused purely
on logistics real estate. Red Fort meanwhile has kept its focus
predominantly on the residential market.
“Strategies today are far more sharply focused than five years
ago, when pretty much everybody wanted to do everything,”
Sriniwasan says. “It’s only now that you get ‘real’ real estate investments, because people have gone through the cycles, people
have learned from their mistakes. There are survivors and then
there are people who decided to leave the industry. That leaves
you with a consolidated industry and very few managers.”
Those that have survived have done so because they have adopted clearly defined and often limited strategies, PERE hears.
And that is playing into the hands of institutional investors
as they seek to cement long-term positions. “The market is a
beautiful thing: it’s weeded out people who know what they’re
doing and those that do not,” Bedi points out. “And so once a
person decides to re-look at India, it’s actually much easier to
underwrite the manager, strategy, track record, and then to
put capital to work.”
While distinct strategies are top of the agenda, also important these days is for real estate investment managers to be able
to demonstrate operational expertise. The ability to source a
development is today as attractive, if not more, as sourcing a
developer with which to partner.
The same applies to developers too when it comes to attracting private equity partners. “The number of developers who
will receive capital has shrunk significantly, so it’s easy for
Subhash or myself or any of these guys to look at the paper and
say, ‘might be a great project, but this developer? Not doing it,’”
Sriniwasan says. Investing then gets even harder as the good
developers become cognizant of their increasingly attractive
position, Jaggi adds.
The participants
Subramanian Sriniwasan
Chief executive officer, Kotak Realty Fund
Director, Kotak Investment Advisors
Sriniwasan joined the Kotak Mahindra
group in 1993, working in its investment
banking joint venture with Goldman
Sachs until 2005. Now serving as the
chief executive of Kotak Realty Fund and
the founder of Kotak Mahindra’s real
estate fund management business, he
raised the firm’s first $100 million fund
in 2005. Under his leadership Kotak Realty has scaled up to
over $1 billion assets under management.
Rajesh Jaggi
Managing partner, real estate
Everstone Capital
With over 14 years of real estate experience in India, Jaggi is responsible for
all facets of Everstone’s real estate
investments and operations. Prior to
Everstone, he was the managing director
of Peninsula Land, a $250 million listed
Indian real estate company. Everstone
has about $2 billion under management
and has developed 33 million square feet of retail, residential, commercial and industrial real estate projects across 16
Indian cities.
Subhash Bedi
Managing director
Red Fort Capital
One of the founders of the $1 billion
Indian real estate fund manager, Bedi has
led or closed about $1 billion of Indian
real estate transactions. Before starting
Red Fort in 2007, he held the position of
partner at advisory firms Krista International and American Capital Realty.
Khushru Jijina
Managing director
Indiareit Fund Advisors
With over 2 decades of experience
in real estate, corporate finance and
treasury management, Jijina was one of
the key founders of Indiareit in 2005. He
played a key role in raising the firm’s two
domestic funds (totaling INR1,014 crores)
and the $200 million Offshore Fund, as
well as in deploying that capital. The firm
currently has INR43 billion under management.
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Roundtable | India
Of course, this emphasis on operational expertise can provoke certain investors to miss out the investment manager
altogether in favor of working directly with the lions within
the developer fraternity. “Developers also know that they are
being chased by private equity money,” Jaggi adds. That is
why, the table agrees, it is important nowadays for the manager to demonstrate its development credentials, whether to
work better alongside developers or, in some instances, replace
them altogether.
Hands on, cash out
Bedi points out that by focusing their strategies on logistics
and residential respectively, Everstone and Red Fort have made
themselves into fund managers cum developers. Further, an
allocator-only approach of throwing capital at developers
from a corporate tower and expecting quarterly interest payments is “doomed to fail,” he claims. “That’s what happened
in 2006: you don’t just show up at a quarterly board meeting
and expect your money back.” Each of today’s participants can
share anecdotes of peers doing that with negative outcomes.
“So all of us have strong operational teams involved in these
projects,” says Bedi, motioning to everyone around the table.
“Because at the end of the day, the developer’s going to give
your money back if he’s making money.” The Red Fort executive says to that end his firm employs staff with development
expertise to ensure a strong outcome.
However adept a firm’s development expertise becomes
working with bona fide developers will remain a reality. Jaggi
The big picture
Inflation (CPI)
GDP growth rate
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
2013
(to date)
2012
2011
2010
2009
2008
2007
2006
0%
2013
(projected)
2012
2011
2010
2009
2008
2007
Indian inflation has been hard to curtail since the global financial crisis started while the country’s growth has also taken a battering in recent years
Source: Inflation.eu; World Bank
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PERE | THE INDIA REPORT 2013
2006
International assumptions
The roundtable underlines the feeling that operating as a fund
manager and a developer concurrently can be challenging,
particularly when you consider India’s real estate investment
proposition predominantly centers on development. One major challenge is staying abreast of local movements in the market and government regulation. Since most regions of India
are subject as much to localized forces as countrywide forces,
adding value in one area of the country might have little in
common with adding value in another.
Jijina says: “People ask me what the prices are in Mumbai
now. Are they going down? You can’t generalize. It can be
central Mumbai versus the eastern or western suburbs. These
markets do not perform uniformly.” He admits this can be
frustrating for new entrants to the market as they apply experiences gleaned from other corners of the globe to India’s
property markets.
International investment assumptions are of little help in
India, Sriniwasan continues. While an investor might balk
at the proposition of say, a township that is completely sold
out even though the road to it still is not built – he has offered tractor rides for site visits on occasion – the development
mentality in the country is such that these schemes often still
work. “These guys are saying: ‘what’s going on in this country?
There’s no road here, but everything is sold,” he explains.
The roundtablers admit the idea of needing “local expertise”
in real estate has been rehashed beyond cliché. However, such
Exchange fate
When it comes to arresting the decline
in value of India’s rupee compared to
international currencies, PERE’s India
roundtable believes India’s central
government has their backs.
Real estate investment managers active in India perennially worry about rapidly changing local policies. That
is unsurprising given India is a country comprising 29
states, each with largely independent economies.
Nonetheless, at PERE’s India roundtable a central
government issue is more pressing: the falling price of
the rupee when compared to international currencies.
The value of the rupee is understandably enough to
keep many fund managers up at night, as it has fallen
by about 50 percent since 2008. In 2013 alone, the currency’s valuation has fallen from INR54.8 per 1 US dollar
to INR61.
The table remarks that it has not seen fall in valuation
like this since 1991. Kotak’s Sriniwasan says it has been
eating into fund performance with some investors having lost 6 percent to 7 percent in value on the exchange
rate alone.
Sriniwasan, however, is not panicking because of
commitments the government has made to prevent it
from dropping too far below 60 rupees to the dollar. In
1991, to honor a similar commitment, the government
actually guaranteed a buffer with its gold reserves, and
Sriniwasan believes it is just as committed this time.
“I’m not worried, because India always works when its
back is against the wall, and it currently has its back to
the wall,” he says.
Currency trap
USD/Rupee conversion last 5 years
65
Rupee per dollar
reiterates the need for a hands-on approach in such situations.
“We actually sit with the developer and go through the plans,
we go through the costing, we go through everything. So it’s
almost like we’re managing the show together.” Such micromanagement was rare between 2005 and 2008. Then, he recalls: “everyone just made investments on a spreadsheet.” The
roundtable agrees unanimously the market is healthier for its
better engagement with development partners.
Further, investing in development via a fund manager like
those present today offers a selection of possibilities in terms of
what form the investment takes. Versus 2006, when investors
had few options beyond taking equity positions in developments, Bedi says: “Today, you can do development as equity,
you can do development as debt, you can actually invest in an
NBFC [non-banking financial company] if you choose to do
so, and you can buy yield-producing assets.”
Playing the role of developer comes with a price for managers, however. For one, most managers cannot charge development fees in addition to management fees. While not a legal
condition, Bedi says it would not be acceptable to institutional
investors, given the high risk associated with deploying capital in what is still widely regarded as an immature property
market.“Investors are happy to give development fees in much
more mature markets to private equity fund managers,” he
says. “I guarantee you, the Indian fund manager is doing triple
what those funds do, but we can’t charge for it.”
Despite begrudging the lack of fees, Bedi’s peers here today
extol a certain prowess when describing their development capabilities. “We always say that we are real estate professionals
first and fund managers second,” says Jijina.
60
55
50
45
40
2009
2010
2011
2012
2013
Rupees have fallen in value by 50 percent compared to the US dollar
and that has trapped some of the first foreign investors in Indian real
estate.
Source: XE.com
are the intricate nuances between one suburb and another,
let alone one city and another, it unquestionably still carries
weight. Jijina illustrates by touching on the processes of gaining planning permissions. Delhi’s system is different from
Mumbai where the process can take up to two years. That implies potentially sticky situations for limited-life investment
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Roundtable | India
mandates that need to see returns quicker. To mitigate possible investment paralysis Jijina says his experience and the
right connections have enabled him to push certain projects
through the system in as little as six months.
Jaggi believes the key to ensuring local expertise is by recruiting in markets in which the firm wants to transact. This
roundtable won’t identify platforms which had “plopped” an
international executive into a role that demanded local nous
but said these platforms were burned because the executive
could not grasp local practices effectively.
This gives the table a reason to warn investors keen to shun
third-party investment managers and tie-up with developers directly to reconsider. One recent tie-up came last summer when Dutch pension manager Algemene Pensioen Group
(APG) partnered with Mumbai-listed developer Godrej Properties (see guest commentary, page 11) to form a residential
development company, with an initial capital injection of
INR770 crore (€109.5 million; $138 million). The JV firm has
earmarked the next seven years for generating returns, and in
the meantime APG has told PERE it is unlikely to commit to a
fund structure in India. Though not referring directly to APG
and Godrej, the managers of this roundtable say that while direct partnerships can work, especially for income-producing
assets, development is an “entirely different animal” and investors doing it directly will need to commit plenty of resources to the effort, and not only capital.
Sriniwasan’s Kotak is one firm that has managed to attract
the capital of large institutional investors that would rather
trust a third-party manager than wade into the market directly. While he could not divulge the firm’s capital raising
activities, it was reported in the summer that Kotak has raised
$200 million in seed capital for its latest offshore fund from
sovereign wealth fund Abu Dhabi Investment Authority. Likewise, Everstone also held a $200 million first close in May for
its $350 million JV logistics fund with capital commitments
from around half a dozen US investors. And PERE has learned
that Red Fort is poised to hold a first closing for its third opportunistic fund for which it wants $500 million.
The members of this roundtable believe it is equipped to
work with developers. “At the end of the day, I would say the
toughest beast to tame in India is your [joint venture] partner,” Bedi says. “A lot of times people ask me, ‘Why are the
Indian managers so cocky?’ Well, the ones that are left have to
tame these lions.” He draws a distinction with “some classic
Harvard business school turned New York investment banker” who, in his opinion, “would be eaten alive,” to explain why
Indian real estate fund managers might have “strong personalities.”
Long haulers
“It’s been our experience that it takes time for a person to peel
the onion on India,” Bedi explains. Consequently, it is of little
surprise to this roundtable that it is the largest institutional
investors that have returned to the market first as these typically have longer-term investment horizons. Accordingly, it
is the prerogative of the managers present today to appeal to
this source of capital with strategies that fit a lengthier tenure
than before.
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“When we’re talking to the LP world, we are actually wanting them to commit money for the longer time frame,” Jaggi
says. The Indian real estate market also goes through very fast
cycles, Jijina adds. A six-year project might pass through two
complete cycles, he points out. As such, a poorly-timed entry
or exit could derail its prospects. Bedi wades in: “Am I brilliant
enough to pick the peaks in values? No. But I do know that the
fundamentals of the middle class are there, so over a five or
six-year project, it’s all going to even out.”
It is little wonder then why certain investors have committed capital to evergreen investment structures that peg their
fortunes to a longer time frame. But what does that mean
for managers of limited life funds? Perhaps predictably, this
group of managers still sees a place for closed-ended offerings. By Bedi’s reckoning a five-year fund is dangerously
short but a fund life of between eight years and ten years is
about the right gauge.
Widely agreed is that the impatience for quick returns
commonly associated with domestic capital makes it less appealing compared to the longer-term positions sought by international equity providers. There’s a feeling that the property investments of India’s non-banking financial companies
(NBFCs), for example, are an accident “bound to happen” and,
as such, avoiding this nonetheless sizable pool of resources is
advisable. The Reserve Bank of India has thousands of NBFCs
registered to hand out short-term loans like banks. However,
the roundtablers believe very few know how to properly underwrite real estate risk nor do they appreciate how long development can take to bear fruit.
And the table points out that international investors that
have taken longer horizon positions, perhaps ironically, have
already begun reaping the rewards. Indeed, since 2010, private
equity real estate firms have made 66 exits, returning more
than $3 billion to investors, according to Venture Intelligence.
While in no way comparable to the mountain of overseas capital invested before the crisis, that’s still quite a leap from the
$736 million returned from 10 exits between 2006 and 2009
that the data provider has recorded.
“The people that had longer-term conviction and stayed
with the long-term story putting capital to work in 2012, 2011,
even 2010, they’ve seen the results, they’ve made money, and
they’re willing to invest more,” Bedi says. Long-term investors
have taken the strategic call to stay invested in India’s property
markets and as such, it is unlikely the market will see such attrition as it did before. “If you know the strategy you’re following, you’re convinced about it, I think then you are able to play
the long-term real estate game,” Jaggi concludes.
By the time the roundtable concludes, the storm has cleared
over Mumbai. The sky is still gray, but the four participants
are glad to step outside for PERE’s cameraman to take photographs set against the city’s varied skyline. The property
visible from the terrace ranges from greenfield developments
in their infancy to completed grade A office buildings, aptly
demonstrating that, even here in India’s financial stronghold,
the market is still a work in progress. For these tigers who
feel their survival enables them to lead investors into the next
chapter for private real estate investing in India, it is work they
are gladly still engaged with.
Four lines of site
At the end of PERE’s India roundtable participants were asked to peer
into their crystal balls to provide a snapshot of what might happen in
the country’s private real estate market tomorrow.
Subramanian Sriniwasan, chief executive Kotak, Investment Advisors: Admitting he is going out on a limb, Sriniwasan predicts private real estate in India will benefit from
much better liquidity during the next 12 to 18 months. In addition to healthier recent capital raisings the Indian government is edging closer to implementing a REIT regime which
this roundtable regards as a viable exit route. Extending the
point, he sees better engagement with international investors from policymakers. “So I would not be surprised if the
carpet is rolled out to sovereign wealth funds and public pension funds, which means better exits and better norms for all
investors,” he notes.
Rajesh Jaggi, managing partner, Everstone Capital: Jaggi
foretells of a private Indian real estate market where there’s
more focus on commercial real estate, even perhaps as much
as there currently is on the country’s residential market. Many
firms are coming to see retail and commercial assets as “insurance,” Jaggi explains. Now that those sectors are becoming more mature and their prices are currently bottoming
out, Jaggi predicts some exciting opportunities to materialize. “I think that’s where the running starts,” he adds.
Subhash Bedi, managing director, Red Fort Capital: Bedi
sees a future involving another wave of institutional capital
seeking private real estate crashing on India’s shores. He cautiously welcomes it but fears there might not be enough appropriate investment opportunities to satisfy the demand.
“We all tell the story, in some way, shape or form, that the lack
of capital has created opportunity for people who have capital in real estate today,” he says. “Could that go away if all of a
sudden a bunch of new capital came to India? Yes, it could.”
Khushru Jijina, managing director, Indiareit Fund Advisors: Jijina predicts the demise of non-banking financial
companies as private real estate investors. Labeling them
short-term in nature and a poor underwriter of risk he says
at least one will “blow up” in the next 12 to 18 months. Says
Jijina “There are many opportunistic lenders in the market
today who are perhaps not adequately underwriting the
risks inherent in investing. There is some stress in the system
and I foresee some defaults as inevitable. I fear that investors
would tend to blame the sector again rather than treat these
as anomalies stemming from a lack of understanding.”
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