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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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slide1

Private Equity in Indian Real Estate

T. Srinagesh

CEO, Pragnya Advisors Pvt. Ltd

August 2012

slide2

Contents

  • Indian Real Estate – Growth and Opportunity
  • The opportunity for PE Funds
  • How PE Fund invests
  • Pragnya Fund
slide5

Indian Economic Growth

After a high growth India has fallen off the cliff!!

2

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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

slide8

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

slide9

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

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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

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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

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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.

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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

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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

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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

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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)

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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

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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

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Who invests in PE Funds

Only qualified people (financially savvy) can be sourced for funds

NO GENERAL PUBLIC

HNIs

Pension funds

Hedge funds

Corporates

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slide21

Leaders in Private Equity

Source of PE Funds

Source: Paper by Rasmit Ali, NSE India

21

slide22

PE - India a major destination

Source: Paper by Rasmit Ali, NSE India

22

slide23

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

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slide24

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

slide25

PE – An important bridge for business scale up

IPO

PE investor

Strategic investor

Angel investor

Own Money

Compliances and regulation increases

25

slide26

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

slide27

PE Funds – Outlook

Colliers International Report July 2012

28

slide28

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

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Investment Process & Monitoring

Financial Evaluation

Market Study & Analysis

Deal Sourcing

Preliminary Due-diligence

Detailed

Due-diligence

Documentation & Disbursement

Negotiation of Terms

25

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Estimated Employment by PE Firms

The PE industry will require a large pool of high caliber professionals

Source: Preqin – Private Equity Spotlight

30

slide35

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

slide36

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

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slide37

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

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