Indian real estate market catches the attention of Donald Trump

According to this report, Donald Trump Jr, son of the real estate tycoon, is planning to set up a $1 billion real estate fund with focus on India. New York based Trump. His company, New York based Trump Organisation is also looking to set up residential and hotel projects in Mumbai, in cooperation with an Indian partner.

Interesting that his focus for this real estate investment is Mumbai, where valuations have been rather stretched, property prices underwent a recent correction and more is expected with more land being released from archaic bureaucratic control in order to counter the land-crunch.

SUN-Apollo Ventures invests $70 million in Amrapali SPV

SUN-Apollo Ventures, the JV between Delhi based SUN group and US based PE fund Apollo Real Estate advisors, has picked a 35-40% equity stake in an SPV of Noida based realty firm Amrapali group. The funds will be used to develop a 200 acre township in Jaipur and a 15 acre project in Noida. The Jaipur project includes housing, retail and commercial development.

Amrapali group has developed six residential colonies around Delhi and current value of on-going projects is pegged at $1.9 billion.

BPTP Ltd. continues to be a favorite with multi-national banks!

JP Morgan made its entry into the Indian real estate market, through a $60 million (3%) equity stake in BPTP Ltd. This continues the dream run for the Faridabad based developer, following Citigroup's and Merrill's investment in the firm.

Citi Property Investments, realty arm of Citigroup, picked up a $80 million (5.8%) equity stake last year. They also recently plegded $160 million towards four SEZs being developed by BPTP in Noida, Gurgaon and Faridabad. Merrill Lynch made a $28 million investment in IT park being developed in Gurgaon by a BPTP subsidiary.

BPTP currently has 65 residential, commercial, IT parks and SEZ projects. They also made news for picking up the largest ever land deal of 95 acres in Noida for $1.2 billion. In their success, they outbid bigger developers such as DLF and Omaxe. The company has so far paid $222 million towards the Noida deal. The latest round of funding, from Citi and JP, is expected to help pay the installments for this deal.

BPTP plans to build a world class business center here including 45.22 million sq ft of offices, 2.5 million sq ft of retail, and 1 million sq ft of hotels and serviced apartments, in three phases, over a decade. Construction costs are estimated at about $1 billion for this project. BPTP is currently looking for funding from PE sources also. The company expects to cash in from the location of the land and its proximity to Delhi's wealthy suburbs and attract tenancy from banks and law firms.

We will continue to track the developer as well the project.

Alpha Investment Partners raises $1.6 billion for a new fund focussed on Asian real estate

Singapore's third-largest developer, Keppel Land's property management unit, Alpha Investment Partners Ltd (AIP), recently raised $1.6 billion for a new fund that will focus on real estate in Asia. The amount is not only $300 million more than its own target, it is also the largest ever raised by AIP since its inception in 2003.

The funds were raised from 15 institutional investors, including European pension funds and banks as well as sovereign wealth funds. With this new addition, AIP will now have $5.2 billion of assets under management. The success of this fund raising shows the confidence that investors have in AIP's management which is in line with their performance in other funds.

AIP raised $243 million, in 2003, for Asia No. 1 Property Fund with a target of 20% IRR. As of March 2008 they had returned 27% and have begun to return capital to the investors. Alpha Core Plus Real Estate Fund was set up in 2004 with $435 million and a target IRR of 12% -13%. The achieved return was an annualised 40 per cent as at March 2008.

The latest fund, Alpha Asia Macro Trends Fund, has a targeted return of 16 % to 18%. They are looking to invest in real estate in Singapore, Japan, Taiwan, South Korea and Hong Kong, and the emerging markets of China, India and Vietnam.

We had commented earlier that funds flush with money are looking to Asian real estate for investment as the western markets continue to remain in flux. This new fund is testament that there is still appetite amongst blue-chip investors to back funds with strong track records.

Unitech raises $300 million to tide liquidity crunch

In an expected move, Unitech International Real Estate Fund has raised $300 million to fund Unitech Ltd.'s residential projects. The investors are supposed to be Japanese banks and European HNIs.

This latest move is in line with the trend we had commented on earlier in this blog. The downside risks in the property market have resulted in downgrades for many of these developers, including United, making raising funds in domestic markets too expensive. Developers are now looking outside of the country to raise funds for projects that they have already committed to.

Parsvnath Builders pick up 38% stake in Sabeer Bhatia's Nano City project

Parsvnath Developers recently picked up a 38% stake in Sabeer Bhatia's famed Nano city project to be built in Panchakali, Haryana, two hours from Delhi. The government of Haryana has a 10% stake in the project through HSIIDC. Sabeer Bhatia's venture into real estate finally seems to be taking off or at the least it is generating more interest from investors.

The Nano city idea was first approved, in July 2005, to be set up, in collaboration with Trident group, as a $250 million drug discovery facility in Punjab. It was expected to provide job opportunities to the engineers from the area in the fields of IT and bio-technology. The proposal was approved by the Punjab government but nothing further was heard of it.

In late 2006, the current Nano city project was kicked off in a new location - Panchakali, Haryana. The scope of the project was increased to include R&D centers and corporate offices for technology, biosciences and other knowledge industries. The project was initially estimated to be at $10 billion. 11,000 acres of land, some of it farm land, were approved by the Haryana government for the project.

In 2007, Goldman Sachs was quoted to have evinced interest in acquiring a 33% stake in the project. The fund infusion was expected to speed up the multi-year project. The funds were earmarked to help in the acquisition of the farm lands that were priced at approximately $200 million. However, that deal did not go through.

Eventually, Parsvnath developers stepped in. At present, they have 114 ongoing projects across the country. This is by far the biggest and most ambitious project in their portfolio. While they do have experience in building townships, IT parks and developing SEZs, the area of development has been less than 500 acres.

Parsvnath's financial picture is interesting. They reported ~20% and >17% increase in net revenues and EBITDA for FY '08 . They also mention that construction costs increased by almost 7% which were apparently offset by increasing real estate prices. Their latest investor update states that they are currently negotiating for FDI sponsorship of their projects.

Their balance sheet appears vulnerable to any major correction in the property markets. With their interest coverage already less than 2.0, increasing funding costs and declining demand, it seems they may have bitten off much more than they can execute with the Nano city project.. especially when there seems to be no clarity, yet, on the revenue stream from the project...

Trikona Trinity Capital's Preliminary Results

Trikona Trinity Capital (Trikona TC) announced preliminary results for the year ended March, 2008. Details are available here.

Key Points:

1. Company has invested in 12 projects so far
2. NAV as of March 31, 2008 was 151 pence per share - up 22% from a year ago. Significantly, the Weighted Average Cost of Capital (WACC) used for computing NAV was increased from 12.88% to 15.54%. In other words, if the WACC was not increased, the NAV would have been much higher than 151 pence. For reference, the units are trading at 77p, almost a 50% discount to NAV.
   
3. Trikona TC divested some portfolio holdings to SachsenFonds in two tranches in November 2007 & June 2008. Importantly, there was very little change in the valuation between the two divestments - a red flag for future prospects.
4. In Trikona TC's latest investment, SachsenFonds and Trikona have a 55:45 share. Together they own 49% of the project and Rustomjee Constructions owns 51%.
   
5. Trikona TC has shifted focus to the infrastructure market to mitigate current market conditions.

Overall, the report has a degree of detail on the various investments and their current valuation. However, when compared to the Ascendas annual report, the Trikona TC report has miles to go by way of disclosure. We have reservations about the WACC figure used and hope to see more details in their final report.

SatyaVani Projects to raise Private Equity

Economic Times has a report about SatyaVani Projects trying to raise $150 million in private equity for projects ranging from a medical tourism project in Hyderabad to an eco-tourism + housing project in Bangalore. As per the website of SatyaVani, the company seems to be focused on engineering design & construction management. In the backdrop of a sharp slowdown across real-estate segments, it will require a leap of faith on the part of institutional investors to invest in a company that has no prior experience of end-to-end project execution. We will remain on the watch for reports of how the fund raising progresses.

DS Kulkarni selling project stakes

Reuters has a news item on DS Kulkarni selling stakes in a couple of projects

1. 50% stake in a premium Bangalore residential project to ICICI Prudential PMS Real Estate Portfolio for Rs. 350 million. Previous reports stated that ICICI Prudential PMS Real Estate fund had raised about Rs. 900-Rs.1000 crores.
   
2. 50% stake in a unit setting up an SEZ in Pune to GTC Cyprus for $90 million. GTC Cyprus is part of the Netherlands based Kardan group.

We expect the trend of institutional investors taking large stakes at an SPV level to gather further momentum over the coming months. Developers are negotiating from a position of weakness and it is only fair for investors to demand their pound of flesh

PEs to bring execution in-house

Economic Times has an article that discusses the plans of PE firms to execute projects in-house. Key points:

1. Funds such as Trikona Capital, South Asian Real Estate (SARE) and Yatra Capital have started to create in-house teams that can execute real estate projects on their own.
2. Kotak Realty Fund had recently made an enterprise level investment in Lalith Ganga Constructions. Kotak’s stake in the company has not been disclosed. Lalith Ganga Constructions is a start-up promoted by Kotak Realty Fund along with Girish Puravankara, the erstwhile deputy managing director of Puravankara Projects.
3. Apart from the cost advantage, this would also mean a lower dependence on construction companies in a scenario where execution capability bottlenecks are threatening to derail projects.

The trend of PE firms starting in-house development arms comes at a time when real-estate developers are facing tremendous pressures - with increasing input costs and slowing demand. Many developers (Eg. Unitech) have gone on record saying that they are looking for substantial PE investments in their new projects. With some PE firms disintermediating the developers, it would not be a surprise if developers are forced to sell part of the land-banks to PE firms (instead of participating in joint-ventures with them).

While PE firms are only now backward integrating by starting development divisions, most large developers have already taken the step of forward integration by raising large funds - on AIM or otherwise. We don't have a view yet of which model is better overall from an investor perspective. While conflicts of interest are lower with the PE firm adding a development arm model, it remains to be seen if the skill sets for execution can be developed quickly.

Tiruppur poised for potential grandiose

Tiruppur has been acclaimed as the "Knitwear Capital" of India. Since the 80's, this small town has contributed much to the exports ($3 billion as of last year) of the country including tie-ups with some of the world's largest retailers and designer brands such as Walmart and Tommy Hilfiger. Yet, apart from the lure of cheap, skilled labor, this town had little to interest anyone other than a textile manufacturer.

However, recently there has been more attention bestowed on the place by the government as well as, private parties. Prime Textiles, one the leading manufacturers of the area, have unveiled plans to develop 20 acres of land for residential and commercial purposes. Landmark Land Holdings, the property investment arm of the Dalmia's group has taken a 25% stake in this project. Landmark holdings have been acquiring stakes in tier II city projects such as Pune, Gurgaon, Bhubaneshwar etc. So, at first glance the Tiruppur acquisition seems to be outside of this strategy. So we chose to delve deeper into the potential for the project.

The Pros -

• Tiruppur has recently been accorded the status of a "district" with portions of nearby Coimbatore and Erode districts being carved out to form this. There is potential for overflow traffic from these well-to-do districts in residential areas.
• The ruling Tamil Nadu government, DMK, have claimed Tiruppur to be central to their existence and have allocated Rs. 5 crores for the development of the district including currently non-existent infrastructure.
• The textile industry contributes more than 90% of exports in the cotton knitwear segment and is likely to continue to be a major contributor to the world cotton exports.
• In line with the above, many of the textile plants, have expansion plans to increase capacity.
• The TEA, Textile Exporters Association, has plans of hiking prices by 15%.
• The region has a very high literacy rate (70%+) which harbors well for development plans outside of textile. Nearby Coimbatore already has a reputation of BPO setups and Tiruppur could potentially follow in its footsteps, increasing overall living standards.

Cons

• As mentioned, this is a DMK pet project and government patronage can drop significantly on any change in power.
• Current infrastructure leaves much to be desired and a drop in government funds can seriously harm growth.
• Exports from the region have seen a decline this year of more than 15%. With the US economy's future unclear, it is difficult to quantify any future valuation with accuracy.
• Human rights activists have voiced concerns on child labor in the region. Any material ruling supporting them will affect cost efficiencies in the factories.

Given the rising star status of the region, it potentially an interesting diversification of Prime Textiles and a good investment for Landmark if nothing unforeseen derails the plans sketched above. However, the success will depend on not just internal factors but also external ones such as economy and government involvement.

Nevertheless, for the next five years, the wheels set in motion are likely to bear fruit for property investors.

Trikona Capital's New Investment In Bandra

Trikona Capital has announced a $40 million deal for the urban rejuvenation (redevelopment) of a 4 acre property in Bandra, Mumbai. Highlights

1. The deal is a co-investment with SachsenFonds
2. Development partner is Keystone Constructions (Rustomjee), a company with whom Trikona has invested previously also.
   
3. SachsenFonds has previously bought $170 million of assets from Trinity Capital, an AIM listed fund managed by Trikona Capital.

Trikona Capital has been among the first few real estate private equity firms in the country. They sport a wider mix of property types than other firms with investments ranging from Fortis Hospitals and Pipavav Port to hotels, office parks and residential townships.

Their sale of assets to SachsenFonds is the first real-estate private equity exit that comes to mind. The cash-on-cash return on those transactions was north of 100%. While the exit is commendable, one cannot help but think that the exit was partly driven by fine-print in the agreement between Trikona and Trinity. Trikona (the manager) gets paid a performance fee on a project basis and not at an aggregate fund level. In addition, as mentioned in Page 78 of the prospectus, there is no clawback feature for the payment of the performance fee. So, if there are two very-profitable projects and two not-so-profitable projects, the investor may not make returns in excess of the 10% hurdle rate, but the manager rakes in a fee on the two very-profitable projects. It is also pertinent to remember that the percentage of the performance fee increases from 20% to 30% if the IRR is more than 30%. Given that the investment was less than 2 years old and the cash-on-cash returns were more than 100%, the sale to SachsenFonds is likely to have generated a large performance fee for Trikona Capital.

More real estate developers turning to alternate avenues for funds and ideas

With direct retail demand flagging and high interest rates inhibiting access to cash, real estate developers are turning to new ways of funding and more attractive development opportunities.

As far as the first goes, there has been little switching cost to developers, so far, as PE firms and sovereign wealth funds flush with oil money are looking at the Indian real estate market as opportunistic investment. Despite, all indications of potential coupling with US markets, and expectations of further corrections in the Indian stock market, most expect the property markets to remain unaffected and still attractively valued especially outside Mumbai. Increasing transparency in the real estate market and ease for foreign investors in acquiring stakes has only added to this attraction, it seems.

The most recent such investment came from Dubai's Pan Atlantic LLC, which, recently bought a 40% stake in an upcoming Bangalore project developed by Sobha Developer Ltd. Sobha plans to develop a 1.7-million-sq ft residential township at the plot in south Bangalore with construction expected to start next quarter.

It remains to be seen, if the recent corrections in the property markets themselves will be a precursor to further revaluations as was the case in stock markets and scare away these new investors (Here is more analysis on the topic). However, in the mean time, funds flush with money and looking for more venues outside of the traditional capital markets are still a source of solace for developers who have already put down money for their projects. It will be interesting to see the actual terms of the deal and how high a cost, developers will have to pay going forward for such alternate funding.

Urban developers are also looking to expand on their portfolio by branching out into the hospitality industry. The above mentioned Sobha Developers is just one of these opportunistic developers. Real estate companies such as Brigade group, Omaxe Ltd, Prestige group, Sobha Developers Ltd and Value Designbuild Pvt. Ltd, are entering into the leisure segment to build health resorts and spas in the backwaters of Kerala or amid the plantations of Chikmagalur in Karnataka.

India's rising economic capital has increased interest and profit potential for resorts and spas developed in easy commuting distance from major cities. Adding to that, the country's reputation for providing world class medical procedures at a fraction of the cost (compared to US and Europe) has seen an increasing trend in medical tourism with major hospitals forging ties with the hospitality industry to provide a better holistic experience.

While such diversification is potentially inevitable for developers, it is questionable if this is the right time. Such resorts have longer break even time and with increasing costs of funding, they may not be the best investment venue for independent developers currently.