In the past, real estate in India was considered a risky asset class to finance by lending institutions. This was reflected in the high rate of capital provisioning on loans extended to the sector. Debt financing markets have since evolved considerably. With recent reform and growth of the real estate market, a number of financing avenues have opened up for Indian developers.
Private equity and debt are the most prevalent forms of investments. According to the Venture Intelligence India newsletter, general private equity investments in India have grown from $1.6bn invested across 68 transactions in 2004 to $2.3bn in 147 deals in 2005 to $1.4bn in 69 transactions in just the first quarter of the year just gone.
Although real estate represented only a part of that, its share is set to grow with the liberalisation of foreign direct investment rules and the rise of numerous Indian and international real estate funds.
Several private equity investment methodologies are becoming more popular. Of the various private equity investment methodologies explored internationally, there are a few options gaining popularity among real estate investors in India.
Project level partnerships are usually joint development agreements wherein the investor can explore either pure equity participation or a combination of development and equity participation. In the latter option, the investor usually provides construction and design expertise as well.
For IT, residential and mixed-use projects, investors are taking stakes of 20 to 50 per cent in special purpose vehicles with an investment period of two to five years and expected unleveraged returns of 16 to 25 per cent.
US-based Sun Apollo has reportedly picked up a 50 per cent stake in a $400m project being developed near Chennai by Sriram Properties, based in Bangalore. Pune-based realtor Gera Developments and Citigroup Property Investors are said to have entered into a joint venture to develop a $125m residential project in Pune.
Apart from pure equity investments, the market has also witnessed hybrid financing structures and syndicated investments.
Investment in real estate entities is an option for investors exploring straightforward investments and business participation. Entity-level participation allows an investor entry as a real estate organisation and affords greater management control in establishing and implementing future growth strategies. These investments are usually fewer and larger – upwards of $75m – with a typical investment period of five to 10 years and expected unleveraged returns of 20 to 35 per cent.
Morgan Stanley Real Estate has invested about $68m in Mantri Developers Private, a private Bangalore-based real estate developer, and about $65m in Alpha G:Corp Development Private, a real estate firm that is based in Delhi.
As India continues on the road to becoming a global economic power, more attention has been paid to real estate as an alternative investment class. Investors stand to gain from strong fundamentals and market returns. Given rising levels of standardisation, access to secondary markets provides alternative exit opportunities for investors. Increasing pressure in developed markets on capitalisation rates is also likely to make India a preferred destination.
Sanjay Verma is joint managing director of Cushman & Wakefield India