Private Equity in Indian Real Estate - PowerPoint PPT Presentation

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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

Key Drivers for Real Estate Growth

1

Indian Economic Growth

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

2

Indian Economic Growth

2

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

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

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

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

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

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

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

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

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

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

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

The opportunity for PE Funds

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

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

Leaders in Private Equity

Source of PE Funds

Source: Paper by Rasmit Ali, NSE India

21

PE - India a major destination

Source: Paper by Rasmit Ali, NSE India

22

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

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

PE – An important bridge for business scale up

IPO

PE investor

Strategic investor

Angel investor

Own Money

Compliances and regulation increases

25

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

PE Funds – Outlook

Colliers International Report July 2012

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