Axis Bank's investment in HCC's Lavasa

There have been numerous reports of Axis Bank's recent investment of Rs. 250 crores for a 2.5% stake in Lavasa Corporation, a subsidiary of HCC and how it implies a valuation of Rs. 10,000 crores for the company. However, we haven't see any comments on the form of the investment. From the article (and the press release):

Axis Bank has infused the funds in the real estate project in the form of convertible preference shares and convertible debentures. This puts the valuation of Lavasa at Rs 10,000 crores.

Based on the language, it is clear that this transaction is a structured investment and not direct equity. So, Axis Bank is probably willing to pay Rs. 250 crores for the 2.5% stake contingent on either events like a development/sales timeline or any future investment/valuations. In addition, since the investment is in the form of preference shares/debentures, Axis Bank will get paid some annual return (which is not true for other equity holders) and till conversion, its securities are likely senior to common stock. It is also important to find out if this investment by Axis is part of a broader transaction (like ICICI Venture's investment in Jaiprakash Infratech). Whichever way you look at it, the math of Rs. 250 crores investment for an eventual 2.5% stake = Rs.10,000 crores current valuation looks hard to swallow

CDC's Investment in Indian Infrastructure & Real Estate

CDC Group has announced a commitment to three Indian infrastructure and real-estate funds. Summary below

1. $ 100 m to IDFC India Infrastructure Fund managed by IDFC Project Equity
2. $ 100 m to Actis India Real Estate Fund
3. $ 50 m to Kotak India Realty Fund

Notes from Hirco (Hiranandani vehicle on AIM)

AIM listed Indian real estate funds have had a rough June, in line with the broader markets and domestic real-estate stocks.

Hirco, the Hiranandani promoted real estate investment company recently filed an update of its sales performance. Summary is below with our comments italicized

1. As of 13th June, 1.69 million sq. ft. of the Hiranandani Palace Gardens residential township in Chennai has been sold at an average price of Rs. 3991/sq. ft. As of 31st March, 1.56 million sq. ft. had been sold at an average price of Rs. 3906/sq. ft. So, the incremental selling price for properties sold in the last two months was Rs. 5019/sq. ft. In contrast, for the previous three month period, the average selling price was Rs.4456/sq. ft. The rise in prices is definitely impressive.
2. The Chennai township has a total buildable area of 30.1 million sq. ft. of which 21.5 million sq. ft. will be residential. So, about 7.9% of the planned residential area has been sold. While the township is planned to be built in three phases, it is kind of disappointing to see that one year of sales (in a relatively robust property market) resulted in only sales of less than a twelveth of the buildable area. With residential property sales slowing down in a big way across the country and interest rates rising rapidly, the outlook for the next twelve months is at best tepid. The Hirco website has a detailed presentation on the company's approach to developing integrated townships. The blueprint suggests that a typical development is a three-phased exercise spanning 84 months with about 15-20% development completed in the first 28 months. Arguably, the current rate of sales is in line with what should be expected, but the changed sentiment in the real estate market suggests that it will take two more years before 20% of the available residential units are sold. As long-time observers of Indian real-estate, we are reminded of the lifecycle of Hiranandani Gardens in Powai. Before it became one of the hottest properties in the area, it was caught in a market-wide slowdown cycle. With our expectations for such a slowdown, we believe investors looking to take exposure to this township should wait till late 2009/early 2010 for an attractive entry-point.
3. Preconstruction sales for the Hiranandani Palace Gardens township in Panvel have been proceeding at a robust pace with 1.44 million. sq. ft. sold at an average price of Rs. 4180/sq.ft. In April, 0.6 million sq. ft. had been sold at an average price of Rs. 4156/sq. ft. The Panvel Township has 18.3 million sq. ft. of buildable space.

Kaupthing to list Indian Infrastructure Fund

Kaupthing, a prominent Icelandic investment bank plans to list its infrastructure vehicle on AIM. PropertyWeek has the story.

Summary:
1. Fund has raised GBP 40 million so far
2. Asset purchases to date include a hydro electric plant, a toll road and a rail freight siding
3. Asset manager will be Bridge Capital Realty from Singapore. Kaupthing has a 20% stake in Bridge Capital. Punj Lloyd also has a stake in the company
4. The fund is called Infrastructure India

We will have more details here once the filings are available

Ishaan Real Estate's Results

The Raheja backed AIM Fund, Ishaan Real Estate has released preliminary results for the year ending March 2008. Full details are available at here.

Key points:

• Portfolio value increased to £810 million from £524#million at 31 March 2007.
• Reported NAV per share at 95.5p.
• Aggregate investment of £159.5 million has been made in nine projects in Mumbai, Hyderabad, Pune and Bangalore with 22.1 million sq. ft. planned for development.2.4 million sq ft of pre-letting secured (including 636,000 sq ft under option).
• Rentals in line with or higher than those anticipated at the time of IPO.In addition to the pre-letting secured, pre-sold approximately 20% of the saleable residential space in premium residential development project, Vivarea, in central Mumbai, at prices above those anticipated at the time of IPO.

We will have a full analysis of Ishaan's portfolio soon. Watch this space.

ICICI Ventures to raise a new $1.5 bn fund

Business Standard has an article about ICICI Ventures raising a new $1.5 bn fund. The interesting aspect of the fund seems to be an option to list the fund on the London Stock Exchange. This innovation will help expand the investor base for real estate private equity funds. In the backdrop of a slowdown in investor appetite for Indian assets and more specifically Indian real estate, it is imperative of fund managers to use every avenue possible to raise capital.

In the current market, when most listed real-estate investment vehicles are trading at a big discount to NAV, it is clear that the option is unlikely to be exercised in a hurry. Investors will be served well to note that till the fund is listed, the investment will remain illiquid and any divestment will likely be at a substantial discount. Of course, even if it is listed, the discount to NAV could be hefty

Indiabulls Property Trust - Update

Previously, I had discussed the IPO of Indiabulls Property Trust in Singapore and how it was floundering in the secondary market. So far this week, the performance continues to be on similar lines. The volume on the counter has come down in a big way - but the core story remains. Only buyer of size remains Deutsche Bank, in their capacity as the stabilization agent. In addition, Farallon filed a notice saying it acquired a further 17 million units in the IPO. We are yet to find out how many units of the IPO went to Indiabulls Real Estate (beyond the 40+% that was already owned by them). In summary, it appears that the IPO had very limited demand even at the lower end of the price band and the clearing price is actually below S$0.9 (where it is being supported right now.

South Indian Real Estate Markets - A view from Ascendas

Ascendas India Development Trust(AI-Trust) recently filed their annual report for the year ending March, 2008. Like many regulatory filings, the report is a goldmine with information on their current rentals, large tenants, new developments in the micro-market and demand/supply. Jones Lang LaSalle Research is the source for a lot of the data. AI-Trust has properties in Bangalore, Chennai and Hyderabad and a large portion of its tenants are IT/ITES companies. An appendix to the annual report has a market research on these markets. Key points and my observations are below

• Property markets in the three cities are divided into micromarkets based primarily on distance from city center. AI-Trust calls these micromarkets Central Business District (CBD), Secondary Business District (SBD) and Peripheral Business District (PBD) in increasing order of distance from city center. All of AI-Trust's properties are in the PBD of the three cities.
• In Bangalore, the Outer Ring Road(ORR) area falls under PBD whereas Whitefield and Hosur Road beyond ORR fall under PBD. Due to new supply in the SBD, primarily eastern stretch of ORR, and excess construction in the Whitefield area, vacancy rates in rose from 3.2% in 2005 to 20.6% in 2007. While leasing activity was strong through 2005, the emergence of ORR as an attractive destination for IT/ITES companies has weighed on properties in Whitefield. ORR is closer to city center, has better connectivity and there are large tracts of land available for development.
• While analyzing competition in the Whitefield area, it is mentioned that rentals in the Whitefield market have seen stagnation over the last year. Also, apart from an SEZ project, upcoming projects are not seeing pre-leasing activity because of competition from ORR. The present stock of space in Whitefield is approx. 10.1 million sq. ft. and an additional 7.5 million sq. ft. of space will be available in the next 18 to 24 months. In 2007, the absorption in Whitefield was about 3.3 million sq. ft. So, on the surface it appears like the demand/supply situation is not terribly off. However, keeping in mind that Outer Ring Road is a preferred destination and that there is a lot of supply coming to market in ORR, it will not be a surprise if the Whitefield market sees a lot of pressure. A large unknown to this equation is the extent to which North Bangalore takes off as a business district. I believe many developers are underestimating the extent to which the locus of activity can shift there - especially given the new airport. It took just 2 years for ORR to displace Whitefield as the preferred location for new offices. In 2009 & 2010, expect North Bangalore - ORR and Bellary Road to be the center of attention.
• In Chennai, Old Mahabalipuram Road and GST Road are the micromarkets that form the PBD. Stock of grade A space went from 1 million sq. ft. in 2002 to 11.75 million sq. ft. in 2007. Vacancy rates bottomed out at slightly below 2% in 2006 and climbed to about 11% in 2007. In 2008, another 8 million sq. ft is projected to become available. Of the 4 million sq. ft. added in 2007, only 70% was absorbed. So, the prospects for the near-term do not appear to be very favorable. Like in Bangalore, pre-leasing activity has slowed down and RMZ Millenia is the only project that has seen some activity. There are large developments planned by DLF, Tata Realty and these could also pose threats to offtake. Different city, same story. As any student of markets will tell you, when supply exceeds demand, prices need to decline till there is a clearing price. Given the evolving demand/supply situation, expect to see projects being delayed even as rents decline. Investors who built up land-banks in these areas will be hit the hardest since land prices will quickly reflect the reduced prospects of these markets.
• Hyderbad seems to the best positioned of the three cities. In the Madhapur area, the vacancy rate is as low as 2% and most buildings are experiencing 100% absorption. While AI-Trust's research seems to be bullish about Madhapur, a look at the numbers indicates reason for abundant caution. Current stock of office space is about 9 million sq. ft. with 2.1 million sq. ft. added and absorbed last year. In 2008, about 7 million sq. ft. of space is coming on line with DLF, L&T and K. Raheja Mindspace being the largest (1.6 m sq. ft., 1.3 m sq. ft. and 1 m sq. ft.respectively). In the backdrop of a slowing US economy and pressure on IT companies, it is hard to imagine a situation where the vacancy rate does not rise materially.

In summary, if I were to grade the PBD markets in the three cities (on a scale of +5 to -5), Bangalore would get a -3, Chennai would get a -2 while Hyderabad would get a +1. Would love to hear any comments readers may have.

Foreign Investors And Indian Real Estate

Business Standard has an article on foreign investors and their expectations with regard to Indian real estate investments. In addition to many quotes from 'experts' without names, there is one from the CEO of Kotak Real Estate Fund

"Real estate developers face a double whammy of slowdown in the overall growth and hardening of interest rates, while the perceived risk-reward equation for India is going down," said S Sriniwasan, CEO, Kotak Real Estate Fund.

In a previous post, I had illustrated the effect of higher interest rates on returns. A related issue is the increase in return thresholds for India investments. In a landscape where US investors can buy money-good mortgage backed securities for 8-9% yield, the target return for an equity investment in Indian real estate will likely be in excess of 20%. Expect investors to be choosy with regard to transactions they pursue and inflexible when it comes to valuations for their chosen transactions. We are also likely to see more structured deals where the developer gets returns only after the private equity investor has reached a minimum level. Needless to say, none of these developments are good for the developer community.

Orbit Corporation - Which way is the wind blowing ?

Reuters has an interview with Orbit Corporation's finance head, Ramashrya Yadav and states that the company expects to add new projects worth Rs.8-10 billion ($400-500 million) in 2008/2009. Orbit has historically focussed on redevelopment and sees an opportunity in cluster redevelopment where it acquires a number of buildings and redevelops them together. The interview is surprisingly upbeat given the negative news around Mumbai real estate.

A few days ago DNA had an article about Kotak Realty Fund calling off a deal to buy Orbit's Hafeez Contractor House, a 0.25 million sq. ft. commercial property in Lower Parel. While the company is looking to pre-sell the property by 2Q08, given the fact that the space will only be available after 2 years and an estimated 5 million sq. ft. of office space is expected to hit the market in that time period, chances are that it will be a buyer's market and Orbit may be forced to lower expectations on the sale price.

Lehman invests in Unitech project in Mumbai

Lehman Brothers Real Estate Partners (the real estate private equity fund of Lehman) has announced a $175 million stake in a Unitech project on the Western Expressway. Since this news has been extensively covered in the media, I will just provide a few links

Business Standard: Lehman real estate arm to invest Rs740cr in Mumbai
Bloomberg: Lehman to Invest $175 Million in Unitech's Project
NDTV Profit: Lehman to invest $175 mn in Unitech's project

Articles mention that the project will be on the lines of Canary Wharf, London and Battery Park City, New York. One hopes that the project does not go through the boom-bust cycle that plagued Canary Wharf.

On a side note, Deutsche Bank is supposed to have evinced interest in the deal initially and passed on it subsequently.

Mapletree Investments - New Kid on The Block

Mapletree Investments (a Temasek subsidiary) has launched a new fund called Mapletree India-China Fund (MIC). Asian Investor has an article about the fund and its tie-up with HSBC Private Bank for distribution. Salient points are below

• MIC is a dual-country, total return fund that aims to capitalise on the growth potential within India and China by developing office, retail and residential real estate within these two markets. Its assets now stand at $1 billion and it has a targeted maximum fund size of about $2 billion. After leverage at the project level, the size of the fund will be $4 billion.The target annual returns for the fund are 20%. Drawdown and investment period is expected to be completed within three years and with a typical lifespan of around five years per investment. There is no liquidity for the fund, and the tenor is approximately eight years
• HSBC Private Bank has been given the exclusive distribution rights for high-net-worth investors via a feeder fund named the HSBC Emerging Growth Real Estate Fund. Ordinarily, tickets of $50 million have to be written in order to invest in this Mapletree fund, but for HSBC private clients, they can come in for $250,000.
• The fund has already made three investments - all of which are in China. Investments have been in a mixed-use development (retail + service apartments), an office block and an integrated retail & residential development

The logistics segment in India is ripe for institutional investing and we have seen some signs of it already (Eg. Old Lane's investment in Sical Infra Assets). With real estate majors looking at logistics in a big way, it is a matter of time before more investors put their money in this space. Given Mapletree's history and investments outside of the MIC fund, as also the real estate investment landscape in India, I would expect them to focus their investments towards industrial/logistics facilities and away from the traditional retail/residential segment.

Affordable Housing - The New Buzzword

With home prices in the large cities showing signs of softness and affordability of houses being cited as a key barrier to increased offtake, affordable housing seems to be the new buzzword for developers (Wonder if this is an acknowledgement that the current crops of houses are not affordable!).

Business Standard has an article on this trend and mentions a host of private equity firms that have committed capital for this space. Firms mentioned include Red Fort Capital, Warburg Pincus and Fire Capital. While the article does not have any great insights into how this segment of the industry is evolving, one datapoint cited makes me wonder if anybody in the editing room is doing a sanity check on what is written.

Recognising the potential growth in affordable housing segment, Delhi-based Omaxe Ltd has formed a company, National Affordable Housing Infrastructure Ltd, which will invest Rs 80,000 crore to develop 100,000 affordable homes across the country.

Sure hope this is a typo and the journalist meant Rs 8,000 crores. After all, Rs. 80 lakh per house is not my idea of affordable housing!!

Global Credit Crunch Hits Indian Real Estate

The Economic Times has a timely article on the cash crunch facing Indian developers. Excerpts below:

The recent bloodbath in the real estate sector has started taking a toll. Almost all large developers are now facing a severe cash crunch and finding it difficult to complete their ongoing projects. In fact, the situation is so bad that most of them have reported a 50-70% cash shortfall. Industry sources told SundayET that the liquidity crunch has forced many developers to pick up cash from the unorganised market at interest rates as high as 35% to 50% annually. The lending rate of banks is between 18% and 20%.

As a result of the crash crunch many developers have started going slow or even stopped construction of projects which are either in their initial stages of development or which would not affect their bottomline in the near future. While most developers that SundayET spoke to, agreed with the problem at hand, none of them were ready to be quoted on how it had affected them.

What’s more, bankers say they may now get more cautious towards lending to real estate developers. “Real estate companies have many projects at hand and the sales have been constantly dwindling. Analysing these sentiments, any financial institution will be cautious. Remember, during monsoons, housing sales come down and banks may have to consider increasing interest rates further in future,” says HDFC Bank chairman Deepak Parekh. State Bank of India (SBI) is no different. It is also contemplating similar measures. “We are not sure for how long the current volatility will exist in the realty market. Also, banks need to maintain their reach among their clients. However, it is possible that all banks may sanction loans to only those developers with whom they have had a long relationship,” says a top SBI official.

Industry experts feel the only avenue available for raising capital in the current situation is at the project SPV level and by way of private equity or similar sources, which is generally the most expensive method of raising capital and has limitations on the over all extent of financing that is required. “Concerns about liquidity will continue to plague the market since debt will not be easily available. Real estate players had traditionally raised money from debt funds via corporate deposits and commercial paper. However, debt funds are currently not eager for more exposure in real estate and are continuously rolling over the debt advanced to these players. The primary source for institutional funding will, therefore, now be private equity,” says JLLM chairman & country head Anuj Puri.

It was only a matter of time before the worldwide squeeze in liquidity affected Indian real estate and this news should not come as a surprise to anybody. While the implications of a liquidity squeeze are no doubt bad for developers, private equity investors who have already taken stakes at an SPV level are also likely to be hit badly. High cost of leverage & delayed cash flows have a severe impact on IRRs. Consider the scenarios below

Even without accounting for any escalation in costs/drop in prices due to softness in the market, returns to the private equity investor drop by more than half due to an increase in the cost of leverage and a 6-month delay. Of course, if even if you add a very conservative input cost escalation (we have seen higher numbers), there is a further drop in realized returns. Not a very pretty sight for anybody who went in thinking this was easy money. The developers are in a slightly better position because a) Their investment in the SPV was likely in the form of land bought at a lower price b) They get paid a variety of fees (construction, project management etc.) and are able to recoup a part of their investment regardless of how little the private equity investor makes.

If the conclusion drawn up in the ET (of private equity being the primary source of institutional funding) needs to hold, expect to see private equity investors demand a very high return on investments going forward. In turn, this does not bode well for Indian developers who not too long ago were in the driver's seat and could choose between investors. The altered landscape is already weighing on the equity markets, though it is not clear to what extent it has been priced in.

Singapore REIT Market And The Indiabulls Listing

Mint has an article on how DLF and Unitech have put off their Singapore listing plan.

Unnerved by withering global equity markets, India’s two leading real estate developers, DLF Ltd and Unitech Ltd, have indefinitely postponed plans to list their real estate investment trusts (Reits) on the Singapore Stock Exchange until market conditions improve, in turn increasing pressure on them to find alternative means to fund projects.

DLF, which was looking to revive the initial public offer (IPO) of its promoter-owned company, DLF Assets Ltd, confirmed that it has postponed the IPO. It had initially planned to update the IPO documents in Singapore by May end or this month.

“We are not going to look at a Reit listing till market conditions improve,” said Ramesh Sanka, group chief financial officer, DLF. He didn’t say what kind of funding the firm would now look at.

Unitech is also not looking at a Reit listing in the immediate future. The company had planned to raise around $700 million (Rs3,000 crore) from the IPO in Singapore.

“At this point, Unitech Corporate Parks is not planning to float a Reit,” said Sanjay Chandra, managing director, Unitech. “We are not talking to any banks.”
Unitech Corporate Parks, the London-listed investment company of Unitech, hopes to sell three commercial assets to the Unitech Office Trust, the proposed Reit of Unitech.

The underperformance of recently listed property trusts is discouraging developers from raising money through this route, which, until six months ago, was considered the most promising way to raise funds.

Indiabulls Real Estate Ltd, the fourth-largest listed Indian developer raised only S$262 million from its Reit offering, less than the S$286 million it had initially sought. And Indiabulls Properties Investment Trust, which made its debut on the Singapore stock exchange on 11 June, has traded for three straight days below its offer price of S$1. Key bankers to the deal said it was a “tough’’ offer to pull off because of the weak sentiment in the equity markets.

While the article does a good job of highlighting the weakness in the Singapore REIT market, it has gone easy on the performance of the Indiabulls Property Investment Trust (IPIT). During the first three days of trading, Deutsche Bank, in their capacity as stabilization manager for the transaction, has purchased about S$20 million worth of units of IPIT (8% of outstanding units). Peering at the trading volumes, one finds that over 90% of the shares traded over Thursday and Friday were purchased by Deutsche Bank - a reflection of the absolute lack of investor demand at that price point. So, the clearing price for IPIT is probably lower.

With this insight in mind, it is fair to say that another avenue for moving assets around to boost valuation (DLF Assets to proposed Singapore REIT, Unitech Corporate Parks to Unitech Office Trust) is not viable in the near term.

IPIT Analysis
At this juncture, it is important to highlight that IPIT has the same assets viz. One Indiabulls Center and Elphinstone Mills, that were partly owned by Dev Property Development Fund (Dev), an Indiabulls Real Estate (IBREL) affiliate that was listed in AIM. (Dev, IBREL and Farallon owned 13%,40% and 47% respectively). Dev was merged into IBREL earlier this year. IPIT purchased these assets and about 85% of the consideration was to paid in the form of IPIT units.

Reading the IPIT prospectus, it is clear that through all these listings (Dev, IPIT) and mergers (Dev & IBREL), the extent of beneficial interest in these properties that has changed hands is not much. Farallon and IBREL owned 87% of these properties when the IPO of Dev took place in 2007. After this listing, they still own 85% of the two properties. One should also note that the IPIT units owned by IBREL and Farallon are subordinated (and locked in) and would be worth slightly less than what IPIT is quoting on the Singapore Exchange.

The IPIT propectus (available on the SGX website) is a recommended read for anybody who is looking to understand the structure of REITs, compensation for property managers/brokers and a list of tenants for the properties in One Indiabulls Center. The prospectus also has good background information on the Indian real estate market, the Mumbai market and the Parel micromarket.