PE Investors are Amassing Unusual Stakes in Indian Real Estate companies. But given their Short Term Profit Interest, there is a Critically huge Potential threat for The Industry. A close look at these Unregulated Flip Artists in The Indian Real Estate space.
A cursory glance of the happenings in the real estate domain in the last three months of the calendar year 2011 brings to light interesting facets: Parsvnath Developers Ltd (a New Delhi based realty firm) has raised a billion rupees by selling 49.9% stake in a housing project (Parsvnath Exotica) to private equity firm Sun Apollo India Real Estate Fund LLC; Red Fort Capital Advisors Pvt. Ltd. is investing Rs.1.5 billion in Ansal Properties and Infrastructure; the real estate market is abuzz with the news that Pune-based Kumar Developers is negotiating with private equity players to raise up to $250 million; Lodha Developers is apparently in talks with Standard Chartered Private Equity to raise approximately Rs.4-5 billion; Shriram Properties is expected to raise over Rs.7 billion from private equity placements while global private equity giant Blackstone based out of US, with a corpus of Rs.49.5 billion is planning to make its India real estate foray by investing close to Rs.2 billion in Bengaluru-based Embassy Property Development. If these examples give you an impression that all that these PE firms have in their hearts is to contribute wholeheartedly towards India’s growth and towards providing housing for the less privileged sections of our society, relax. PE firms are worse than fair weather friends, as they singlehandedly have the potential to ensure the destruction of the ‘fairness’ in the weather. Take these case study examples.
While we had the likes of Morgan Stanley (which invested $68 million in Mantri Developers through its real estate arm), Siachen Investments (invested $100 million investment in Nitesh group), the Chatterjee Group (proposed $450 million investment in commercial properties), Trinity Capital, et al during the mid 2000s who invested, we also had the opposite club led by examples like Symphony Capital (exited its investment in DLF Assets Ltd; DLF bought the stakes from Symphony Capital in a deal valued at $695 million), Siva Ventures (exited Amby Valley Ltd’s in a buyback deal valued at $323 million). Numerically speaking, data from Venture Intelligence reveals that in 2010, there was about $1.5 billion worth of investment across 46 deals in the real estate sector compared with $749 million across 23 deals in 2009. A simple back of the book analysis makes it amply clear that the Indian real estate sector accounted for approximately 20% of all PE investment in 2010 and about 15% of all deals. Now comes the real hitter. In 2010 itself, there were eight exits in the real estate space worth $1.24 billion (statistics from VCCEdge indicate that in the current year, there have already been six recorded exits worth a combined $124 million). It doesn’t require a high profile stock analyst to deduce that PE firms, overall, have been simply playing the Indian real estate market, using opportune moments to buy in or sell out, behaving more like hot money stalwarts in the FII market than as the quasi FDI investors they were supposedly expected to be. PE investments overall have been growing; no doubt about it (PE investment in India rose 57% reaching $3.3 billion in Jan-March 2011).
But as data shows, so have PE exits. For an industry to grow over the years, what in general is critically important is a continuous supply of money, where the overall money supply within the industry keeps growing. The case, especially in the real estate industry, and more specifically due to the PE behaviour, is that there only remains an illusion of money moving; with the reality being a constant fight by real estate developers for stable sources of funds. The illusion of PE money flowing into a domestic real estate firm creates the subsequent move towards higher valuations – a self fulfilling and deprecating move. An IIT Madras study that studied VC and PE investments over a period of 2004-9 mentions how surprised the researchers were when they found that the average duration of such investments is only 17 months. 17 months? Are we supposed to believe that real estate projects in our country are being planned, implemented and sold within 17 months on an average?
Even industry players like Suresh Swamy, Executive Director, PwC, Vikram Hosangady, Executive Director, Transaction Services KPMG India, accept this phenomenon of PE involvement and the effects beyond. But the blame in this case perhaps rest completely with the government, and specifically with the RBI and SEBI. Till date, after so many years of brandishing the liberalisation and globalisation flag, and after so many years of allowing foreign capital to enter Indian markets, there is still no regulatory act or guideline or body that controls PE investment into India. While statements there have been many, all that would remain plain filibustering until the bodies that were supposed to be responsible for controlling foreign fund inflow put their words into action. What is required is for RBI and SEBI to set up a set of guidelines that defines the exact procedure under which a PE would be allowed to function, the minimum price at which it would be allowed to buy into a domestic company, a lock in period that would ensure that PE firms do not hold the domestic firm to ransom, a preferred or proposed exit strategy (for example, IPOs are the most transparent of all exit strategies) and most importantly, a body that would register not only each and every entry or exit of any PE firm, but also their financial transactions to the tee. Of all these requirements, there is no gainsaying the fact that the most important one is the lock in period. Currently, such lock-in periods are engineered solely on the negotiating power of the domestic firm, and on how desperate it is for funds – for example, just as recently as in March 2011, six PE firms were lined up to invest in Hero Investments, for providing the money to the Hero group to buy out Honda’s investment in Hero Honda; with the clause being that the PE firms would have an eight year lock in period. That, for all practical purposes, resolves the issue there and then. But now every company in India has the negotiating power of the Hero Group, and least so in the Indian real estate sector.
India requires approximately 7.5 million housing units to take care of its surging demographics. Being part of an approximately $12 billion sector, which is growing at a CAGR of 30% and accounts for about 5% of the country’s GDP, it is ironical that outside players are taking undue advantage of the supply side constraints. While on one hand, the RBI has not even been able to handle the issue of inflation properly, on the other hand, we have SEBI which is more intent on moving proposals that would now allow it to tap phones of market traders (and for that matter anybody and everybody they wish). We guess they have a lot of staff and time at their disposal for doing that... Some moments invested in this issue won’t harm them either.
While we had the likes of Morgan Stanley (which invested $68 million in Mantri Developers through its real estate arm), Siachen Investments (invested $100 million investment in Nitesh group), the Chatterjee Group (proposed $450 million investment in commercial properties), Trinity Capital, et al during the mid 2000s who invested, we also had the opposite club led by examples like Symphony Capital (exited its investment in DLF Assets Ltd; DLF bought the stakes from Symphony Capital in a deal valued at $695 million), Siva Ventures (exited Amby Valley Ltd’s in a buyback deal valued at $323 million). Numerically speaking, data from Venture Intelligence reveals that in 2010, there was about $1.5 billion worth of investment across 46 deals in the real estate sector compared with $749 million across 23 deals in 2009. A simple back of the book analysis makes it amply clear that the Indian real estate sector accounted for approximately 20% of all PE investment in 2010 and about 15% of all deals. Now comes the real hitter. In 2010 itself, there were eight exits in the real estate space worth $1.24 billion (statistics from VCCEdge indicate that in the current year, there have already been six recorded exits worth a combined $124 million). It doesn’t require a high profile stock analyst to deduce that PE firms, overall, have been simply playing the Indian real estate market, using opportune moments to buy in or sell out, behaving more like hot money stalwarts in the FII market than as the quasi FDI investors they were supposedly expected to be. PE investments overall have been growing; no doubt about it (PE investment in India rose 57% reaching $3.3 billion in Jan-March 2011).
But as data shows, so have PE exits. For an industry to grow over the years, what in general is critically important is a continuous supply of money, where the overall money supply within the industry keeps growing. The case, especially in the real estate industry, and more specifically due to the PE behaviour, is that there only remains an illusion of money moving; with the reality being a constant fight by real estate developers for stable sources of funds. The illusion of PE money flowing into a domestic real estate firm creates the subsequent move towards higher valuations – a self fulfilling and deprecating move. An IIT Madras study that studied VC and PE investments over a period of 2004-9 mentions how surprised the researchers were when they found that the average duration of such investments is only 17 months. 17 months? Are we supposed to believe that real estate projects in our country are being planned, implemented and sold within 17 months on an average?
Even industry players like Suresh Swamy, Executive Director, PwC, Vikram Hosangady, Executive Director, Transaction Services KPMG India, accept this phenomenon of PE involvement and the effects beyond. But the blame in this case perhaps rest completely with the government, and specifically with the RBI and SEBI. Till date, after so many years of brandishing the liberalisation and globalisation flag, and after so many years of allowing foreign capital to enter Indian markets, there is still no regulatory act or guideline or body that controls PE investment into India. While statements there have been many, all that would remain plain filibustering until the bodies that were supposed to be responsible for controlling foreign fund inflow put their words into action. What is required is for RBI and SEBI to set up a set of guidelines that defines the exact procedure under which a PE would be allowed to function, the minimum price at which it would be allowed to buy into a domestic company, a lock in period that would ensure that PE firms do not hold the domestic firm to ransom, a preferred or proposed exit strategy (for example, IPOs are the most transparent of all exit strategies) and most importantly, a body that would register not only each and every entry or exit of any PE firm, but also their financial transactions to the tee. Of all these requirements, there is no gainsaying the fact that the most important one is the lock in period. Currently, such lock-in periods are engineered solely on the negotiating power of the domestic firm, and on how desperate it is for funds – for example, just as recently as in March 2011, six PE firms were lined up to invest in Hero Investments, for providing the money to the Hero group to buy out Honda’s investment in Hero Honda; with the clause being that the PE firms would have an eight year lock in period. That, for all practical purposes, resolves the issue there and then. But now every company in India has the negotiating power of the Hero Group, and least so in the Indian real estate sector.
India requires approximately 7.5 million housing units to take care of its surging demographics. Being part of an approximately $12 billion sector, which is growing at a CAGR of 30% and accounts for about 5% of the country’s GDP, it is ironical that outside players are taking undue advantage of the supply side constraints. While on one hand, the RBI has not even been able to handle the issue of inflation properly, on the other hand, we have SEBI which is more intent on moving proposals that would now allow it to tap phones of market traders (and for that matter anybody and everybody they wish). We guess they have a lot of staff and time at their disposal for doing that... Some moments invested in this issue won’t harm them either.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
