Private equity looks to repeat Irish gains in India
A rusty six-storey steel structure surrounded by tin-sheet huts stands on a prime plot overlooking one of Mumbai's largest open spaces of greenery: The horse-racing track in the city's plush Mahalaxmi area. What was to be a soaring luxury skyscraper from DB Realty has been languishing for more than five years, with the developer's website still claiming that the project will be launched soon.
It's a familiar scene across India's cities, where thousands of idle construction sites offer testament to byzantine approvals processes and debt-laden developers' inability to finance projects to completion. It is also an opportunity too big to pass up for moneyed-up investors such as KKR.
In an echo of what has happened in Ireland over the last five years. such buyers are flocking to India, lured by the prospect of acquiring property at deep discounts from down-and-out developers. While in Ireland investment firms spent billions buying up huge swathes of commercial real estate such as office, apartments and shopping centres as well as loans with a par value of billions of euro, many of those firms are now cashing in on their Irish assets and looking at where the next struggling economies and property markets are located. One of those markets is the former "jewel in the crown" of the British Empire.
Private-equity investment in India's real estate sector jumped to the highest since 2008 last year and may almost triple this year, to $8bn (€7.4bn), according to the local unit of property broker JLL.
"With so much debt on the balance sheet of developers, it provides a wonderful opportunity for large players over the next one to two years where distress will be available in the market," said Mumbai-based Amit Bhagat, chief executive officer at ASK Property Advisors, which manages $500m in real estate assets.
Developers' cash flow from operations has not been sufficient to cover their finance costs since the fiscal year ended 2012, according to a Moody's Investors Service report. The aggregate cash flow from operations for six developers tracked by Moody's was at 3bn rupees (about€40.5m) in the fiscal year ended March 2015, dropping from 30bn rupees in 2011, while total interest costs rose to 36bn rupees from 29bn rupees in 2011, the data showed.
The influx of money is reminiscent of a decade ago, when investors lured by India's economic growth drove property prices to records. Private-equity investment in real estate peaked at $8bn in 2007 before slumping, data from JLL India show.
Piramal Fund Management, part of thebnaire Piramal family, is among investors setting its sights on the market. The fund is distributing about 150bn rupees to about 10 developers that are in a position to buy land from, or start developments together with, struggling competitors. Piramal plans to pre-sanction at least 10bn rupees to each developer allowing them more flexibility in closing deals, Khushru Jijina, the managing director of Piramal Fund Management said in an interview.
Jijina expects yields of as much as 24pc from buying equity in real estate projects. That's because prices have fallen about 10pc to 15pc across the country over the past couple of years.
"The market timing is opportune to underwrite equity risk," Jijina said in an interview. "The flood of money that came in 2006 was when pricing was at its peak. In 2016 prices have bottomed out."
Project delays are endemic in India, where developments often get hung up for years by red tape.
Some projects have been languishing for more than eight years, according to Liases Foras, a real estate research firm. Developers who have loaded up on debt to finance projects often have to stop building as a result.
DB Realty said changes in building rules have delayed the construction of its 'Turf View' project in South Mumbai. The planned 320-metre tower will be designed by architect Adrian Smith, who has designed the world's tallest towers including the Burj Khalifa in Dubai and the Kingdom Towers in Jeddah, Saudi Arabia.
The tower could yield 80 floors depending on the design, N.M. Gattu, chief financial officer at DB Realty said in an e-mailed response to queries. The company has now received all necessary approvals and plans to launch the development "soon", Gattu said.
For a majority of Indian developers, most of the revenue they make gets sucked into funding new construction and making interest payments, according to Singapore-based Subhash Bedi, chairman of Rising Straits, which manages about $1bn of property assets. Interest costs for some developers can top 20pc, according to Liases Foras.
"There is a trust deficit between consumers and builders," as consumers hold off on purchases because they don't trust that the developments will be finished on time, Bedi said in an interview. "Distressed developers with over-leveraged balance sheets need to pay off high-cost debt."
Rising Straits is considering raising a new fund this year to invest in India real estate, Bedi said without providing details.
India's real estate market is also drawing some of the biggest names in global investing.
KKR will invest in two Mumbai projects being developed by Sunteck Realty, a developer of luxury condominiums, the companies said in February. The deal came after Sunteck Chairman Kamal Khetan said last year that he was scouting for distressed assets and would need capital to help fund such acquisitions.
Singapore sovereign wealth fund GIC in December invested 19.9bn rupees in a joint-venture housing project in central Delhi with India's largest developer, DLF. DLF, whose net debt is more than half of the combined debt of India's six biggest developers, has been struggling to pare borrowings amid slowing sales. Over the past 18 months, residential markets continue to be soft in most markets where DLF has a presence and the outlook continues to be weak, the company said in a presentation.
"There is huge opportunity to provide execution capital to developers," Rising Straits' Bedi said. "Great opportunities will emerge in asset sales." (Bloomberg)