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Private Equity in Indian Real Estate

Private Equity in Indian Real Estate. T. Srinagesh CEO, Pragnya Advisors Pvt. Ltd. August 2012. Contents. Indian Real Estate – Growth and Opportunity. The opportunity for PE Funds. How PE Fund invests. Pragnya Fund. Indian Real Estate – Growth and Opportunity.

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Private Equity in Indian Real Estate

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  1. Private Equity in Indian Real Estate T. Srinagesh CEO, Pragnya Advisors Pvt. Ltd August 2012

  2. Contents • Indian Real Estate – Growth and Opportunity • The opportunity for PE Funds • How PE Fund invests • Pragnya Fund

  3. Indian Real Estate – Growth and Opportunity

  4. Key Drivers for Real Estate Growth 1

  5. Indian Economic Growth After a high growth India has fallen off the cliff!! 2

  6. Indian Economic Growth 2

  7. But Still the Long Term Story……. Demographics • A large young population and more working people as percentage of total • The continuing increase in working age population will add to the country’s savings and investment rates Source: US Census Bureau 3

  8. Long Term Story……. Urbanisation • By 2019 an additional 100 million people would have moved to urban areas • The movement away from low productivity agricultural sector to more productive sectors in urban areas is adding to the national economic growth rate Source: Indicus Analytics 4

  9. Long Term Story……. Evolution of The Middle Class • The share of middle class rose from 15.00 % in 1993 to 47.00 % in 2010, reaching critical mass and influencing policy Middle class will increasingly influence with growing incomes, purchase of lifestyle products – houses, cars, luxury wear, etc. Source: Bhalla S. S., Note: Middle class is defined in the above chart as a family of four with a household income of Rs. 150,000 per annum 5

  10. Long Term Story……. • House Hold Incomes expected to rise • Households earning over INR 1,000,000 per annum (US$ 22,222) will increase from the current 5.4 million to 16.1 million i.e. an increase of 10.7 million households • Households with an income of over INR 300,000 but less than INR 1,000,000 (US$ 6,666-22,222) will grow from current 22.9 million households to 50.2 million households • 255 million will enter the workforce in this decade Source: Indicus Analytics 6

  11. Long Term Story……. Under Leveraged Consumer • Indian consumer balance sheets are under leveraged in comparison to other developed countries. The share of consumer loans has started to rise with arrival and growth of privately owned Indian banks • As the banking system continues to open up and provide greater access to the Indian middle class, it is likely that both consumption and asset creation will get a boost Source: GS Calculations, Global Economics Paper: 169 8

  12. Indian Real Estate – Growth & Opportunity What Happened – 2005 through 2012 • The opening of the real estate sector to foreign direct investment (FDI) in early 2005 led to an unsustainable rise in the markets followed by an inevitable correction • The low interest rate regime of 2003 to 2007 caused real estate prices to bubble • Access to capital for the sector became easier after 2005. Apart from FDI, the industry found that it could access the banking system as well as public markets • Developers undertook major expansion with by acquiring land parcels at inflated prices and in impractical locations. Even Governments joined the party by auctioning land at unreasonable prices. 9

  13. Indian Real Estate – Growth & Opportunity What Happened – 2005 through 2012 • The expansion plans initially took the form of national land grab • Organizations hired inexperienced staff, loaded balance sheets with unsustainable debt and launched projects in areas beyond their spheres of competence • Lack of experience of equity and debt market participants in valuing real estate companies and is more speculative • High cost of land and construction led to a costly product not supported by fundamentals • Procedural delays in obtaining permissions to construct added to the woes of the industry 9

  14. Indian Real Estate – Growth & Opportunity Where we are now – post slowdown, regeneration and resilience • Developers have spent the last year or so in cleaning up their balance sheets and dropping ill-conceived projects • Improved focus on the customer and the product-mix that is actually in demand • There is excess in all verticals of the past few years that need to be absorbed • Affordable housing is targeted at middle class households. The number of such customers is large and growing at fast pace 10

  15. Indian Real Estate – Growth & Opportunity Where we are now – post slowdown, regeneration and resilience • The industry that is slowly emerging from the downturn of 2008 and 2009 is better placed and organized today to take advantage of an economy that is regaining its growth • Transparency in the sector continues to improve with more listed entities being involved, central government plans to set up a real estate regulator • Current FDI norms for capital flows are still restrictive and favor large developments 10

  16. But the Macro Picture is Grim • The interest rates are very high. Raised 13 times since March 2010. Interest rates are double whammy for real estate as it increase construction finance cost as well as home loan costs. • The GDP rates will continue to languish • The external macro environment is also equally bad with US and Europe are in near recession • The demand for housing has been slow (except for Chennai), 50 million sft in the top 7 cities remains unsold. But the developers are unable to reduce prices due high cost of inputs like cement and steel leading to stagflation (a situation quite dangerous) 10

  17. If there is will, the situation can be changed • The only hope is that Governments will take policy decisions to improve economy and get domestic as well as foreign investment kick started • Facilitate infrastructure investments • The FDI norms for capital flows are still restrictive and need to be relaxed • Exit mechanisms like REIT UNITs etc. to be created • Any positive action, the whole sentiment and momentum will change 10

  18. The opportunity for PE Funds

  19. The Opportunity for PE Funds The nature of PE Funds • Large Size Funds • Specific Investment Class (Real Estate, Venture Capital) • Limited Investors • High risk and returns over a longer period • Low to medium liquidity • Life of 6-10 years 19

  20. Who invests in PE Funds Only qualified people (financially savvy) can be sourced for funds NO GENERAL PUBLIC HNIs Pension funds Hedge funds Corporates 20

  21. Leaders in Private Equity Source of PE Funds Source: Paper by Rasmit Ali, NSE India 21

  22. PE - India a major destination Source: Paper by Rasmit Ali, NSE India 22

  23. Major Real Estate Funds in India • Pragnya • ASK • Blackstone • Capitaland • Fire Capital • GIC Real Estate • GTI Capital • HDFC PMS • ICICI Prudential • IL&FS RE • IndiaReit • Infinite • IREO • JP Morgan • KotakRE • Mapletree • Morgan Stanley • MotilalOswal RE • New Vernon • Paracor • Primary RE • Red Fort Capital • Temasek • Tata Realty • TCG • Xander 23

  24. PE Funds – Life Cycle Establish an Indian company to mange the fund Establish a tax efficient vehicle, e.g.., Mauritius Experienced Sponsors put seed money Close the fund after a term and share profits Raise money from LPs 1 Year 2 - 3 Years 5 - 7 Years Fund Raising Cycle Portfolio Exit Cycle Fund Deployment Cycle 24

  25. PE – An important bridge for business scale up IPO PE investor Strategic investor Angel investor Own Money Compliances and regulation increases 25

  26. PE – How do they help businesses Enhances enterprise value Exit ensures efficient markets since the assets are sold for cash High level of domain knowledge, expertise Improvement in process/ systems 26

  27. PE Funds – Outlook Colliers International Report July 2012 28

  28. Challenges for Real Estate PE Funds • Complex regulatory issues relating to sector investment • Poor operating environment including poor corporate governance and inefficient legal system • Tax environment and a costly process to create a tax efficient structure for international investors • Limited number of firms with credible promoters resulting in steep valuation expectations making them less attractive for the PE funds • Relatively slow pace of reforms • Exits are a major constraint 29

  29. How PE Fund invests

  30. Investment Approach 24

  31. Investment Process & Monitoring Financial Evaluation Market Study & Analysis Deal Sourcing Preliminary Due-diligence Detailed Due-diligence Documentation & Disbursement Negotiation of Terms 25

  32. Skills and Experience 25

  33. Estimated Employment by PE Firms The PE industry will require a large pool of high caliber professionals Source: Preqin – Private Equity Spotlight 30

  34. Pragnya Fund

  35. Pragnya Fund PF II Raised Invested in 8 (eight) projects across India & Sri Lanka 2012 Pragnya Group (The Growth Story) First Investment in L&T Tech Park, Kochi from PF 1 2006-11 Investments by Principals 2006 2003 4

  36. Pragnya Group – Major Investments Rajahmundry Bangalore Pragnya Fund has till date invested in 8 (eight) projects across the country to deliver a total Built Up Area (BUA) of over 13 million Sqft 32

  37. Pragnya Group – Investments L&T South City - Chennai L&T Tech Park - Kochi Bridge County, Rajahmundry Habitat Crest, Bangalore VGN Hazel, Chennai Platinum 1, Colombo Genexx Heights, Barrackpore Genexx Exotica, Asansol 1

  38. Thank You

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