When the Indian real estate market opened its doors to investors in 2005, there was a wave of fund managers eager to participate.
The country was just one of many emerging markets that made compelling investment sense: an increasingly affluent middle-class, a young population and an economy that was growing annually at around 8 percent.
But as Millennium Spire's managing director Abhijeet Bhalla recounts to PERE, while the opportunities were “fantastic”, so too were the risks. “When the economy opened up there was a huge opportunity, but at the same time there was just as large an opportunity to lose money,” he said.
As a primarily development-focused investment opportunity, India's real estate market was dominated by the country's large, formerly family-run, developers. There were few, if any, investment managers-cum-developers operating on the landscape.
Millennium Spire's decision to operate such a model was therefore challenging, according to Bhalla, and – of course – more expensive. Around three-quarters of the team in India are real estate professionals with development experience, rather than just investment executives.
However, as the New Delhi-based firm eyes declining property valuations and a credit market that has all but ceased to exist in the past three months, it is a strategy, they say, that is paying off.
Millennium Spire raised its first fund, Millennium Spire I, in May 2007, raising $35 million. The first fund has been fully deployed into residential mixed-use and commercial developments, with plans to follow-on the first vehicle with Millennium Spire II in the first half of this year. The second fund is expected to target between $250 million and $350 million.
Bhalla said the traditional investment method in India would see GPs invest in an existing deal, usually being promoted by one of India's larger development companies. The deal, Bhalla added, will have been aggregated, packaged and planned by the developer, with investors entering the fray at the later stages of the development cycle.
During the height of the real estate boom, developers were able to charge premiums for deals as increasing amounts of capital sought to be deployed. Once invested, though, what control did fund managers really have, Bhalla asked?
There have been some cases, Bhalla said, of developers bypassing concerns from GPs about project management decisions. Bhalla said there is no such thing as a third party developer market in India, meaning investors have little place to go if a developer does decide to withdraw from a deal. “It just doesn't exist in India so the investor is stuck if they cannot take over the project themselves.”
Millennium Spire instead said it makes equity investments in Indian deals, where the firm has substantial physical control over architecture, construction and the entire development cycle. It has the ability, Bhalla said, of actually taking over a project if need be.
“If a developer is not cutting it we are able to get in there, and take over,” Bhalla said. As part of that strategy, Millennium Spire has created Spire World with which to brand its developments.
The past six months though has been a time of rapid change for the Indian real estate market, not least in terms of property valuations, but also the investor landscape. Bhalla said there now fewer real estate investors clamouring to be part of the next deal, with many non-traditional GPs, such as hedge fund managers, returning to their core business.
“Two years ago you had a lot of investors jumping on the bandwagon of wanting to get into the India real estate market. There was an insane euphoria surrounding the industry and it really pushed up capital values,” he said. “All you needed was the word India and real estate and you had a line of people at your door. That bandwagon seems to be going away.”
Bhalla remains cautiously optimistic for the future of the Indian real estate market, though. “The opportunities are fantastic, but the problems surrounding them can also be immense. The object we have is to try to reduce the investment equation to one of business risk.”