Real estate funds are now set to rival FII flows

Praveena Sharma, Ashish Tiwari & Sanat Vallikappen

BANGALORE/MUMBAI: If you think foreign institutional investment (FIIs) in the stock market is big money, you ain’t seen nothin’ yet. The FIIs invested $18.69 billion net in 2005 and 2006 combined, but that kind of money is already visible in real estate - over $ 17 billion, and counting.

Of the $ 17 billion heading towards the Indian property market, $ 7.78 billion has already been raised, and another $ 8.58 billion is in the pipeline (see chart). Domestic investors have additionally contributed close to $ 1 billion to the kitties of real estate and infrastructure companies through initial public offerings (IPOs), and further billions will be raised when DLF and other realty companies hit the markets over the next few months.

A major source of finance is venture capital (VC), with Sun-Apollo Venture Ltd being the latest to raise Rs 2,835 crore ($630 million). A joint venture between the Khemka family-owned Sun Group and global real estate player Apollo Real Estate Advisors, Sun-Apollo has raised the money from investors in the US, Europe and the Middle East.
According to Shahzaad Dalal, vice-chairman and managing director of IL&FS Investment Managers, India will see flows of between $5-10 billion this year from VC funds alone. And the main reason for this rush if higher returns. Sun-Apollo managing director Chetan Dave expects a risk-adjusted return of over 25% on his investments in India.
“I would say this is a very attractive return in comparison to many other markets,” says Dave.

Another recent announcement was the one by Dubai-based real estate company Emaar Properties, which, along with its Indian joint venture partner MGF, has planned an investment of $4 billion (Rs 18,000 crore) in various housing and infrastructure-related projects in the coming years.

The Associated Chambers of Commerce and Industry of India (Assocham) believes that overseas real estate giants like Royal Indian Raj International, Blackstone Group, Goldman Sachs, Emaar Properties, Pegasus Realty, Citigroup Property Investors, Lee Kim Tah Holdings, Salim group, Morgan Stanley and GE Commercial Finance are likely to cumulatively bring in $8 billion of investments into the sector.
Vikas Oberoi, managing director of Oberoi Constructions, says the rush is a good sign. “Real estate is already getting commoditised and the market scenario we are
witnessing, and will continue to witness in the coming years, is a pure demand and supply game. The good thing about all the money coming into the sector is that the funds are getting invested in the right kind of projects,” adds Oberoi.

While venture capital funds may be busy raising money abroad, Indian real estate companies have also been in the thick of action, raising money from the public market.

GMR Infrastructure, Lanco Infratech, Parsvnath Developers and Sobha Developers were the big-ticket IPOs that entered the market towards the end of 2006.

Another source of quick money has been the Alternative Investment Market (AIM) on the London Stock Exchange. Among firms that have already raised funds for India through AIM are New-York based Trikona Capital (around $450 million through its fund Trinity Capital), the CL Raheja-promoted Ishaan Real Estate ($341 million), the Unitech-promoted Unitech Corporate Parks ($710 million) and the Hiranandani-promoted Hirco plc ($750 million). Waiting in the wings is Indiabulls Real Estate, which is raising $624 million through Dev Property Development.

Though all this may augur well for the real estate sector, one school of thought thinks that these huge sums are only going to drive up already soaring real estate prices. A recent survey by global property advisors DTZ Debenham Tie Leung has put Mumbai and Delhi as the fourth and eighth most expensive CBD (central business district) office locations in the Asia-Pacific. The survey revealed that the cost per workstation in Mumbai and Delhi is as high as $11,400 and $8,150 per annum.

However, investment managers and real estate experts disagree. “It’s the rising level of affluence in the country that’s driving up real estate prices. So far, real estate funds have not made a difference to property prices,” says Dalal of IL&FS Investment Managers. “Further, all the money being raised does not get deployed in a single year. It’s spread out judiciously over three to four years,” adds Dalal. For example, Morgan Stanley Real Estate plans to invest more than $1 billion over the next four or five years.
For a project to be compliant with Indian foreign direct investment (FDI) laws, the size of the land to be invested in needs to be a minimum of 25 acres, or the construction area should be in excess of 50,000 square metres. Further, the minimum investment should be $10 million, and investors should be locked in for a minimum of three years.
Moreover, at least 50% of the project should be completed in three years.

“With these guidelines in place, an overseas investor is not someone who is buying and selling property, and thus jacking up prices,” says Pranay Vakil, chairman of Knight Frank. “In a city like Mumbai, where prices have been shooting up, where is the space for such FDI-compliant projects?” he asks.

It’s not just overseas institutions who are getting a slice of the action. Dalal recently closed his IL&FS Realty Fund with $525 million being committed from overseas as well s domestic investors. While ICICI Venture and its partner Tishman Speyer are committed to bringing in around $1 billion, Kotak Realty Funds and HDFC’s real estate division are planning to tap money from both domestic and overseas investors.

India needs 30 million square feet of office space per year, and has a shortage of 22 million dwelling units. Till this gap is narrowed, investors will remain gung-ho on Indian realty.