ASIAVIEW: Nearly, nearly

Jonathan Brasse

The Indian Peepal tree is revered for many reasons. Besides its reputation for being among the oldest species in the country, its medicinal qualities are marvelled by doctors and spiritualists alike. Its bark is said to cure snake bites and night blindness.

Just how successful the sale of Peepal Tree Properties, a coincidently-named special purpose vehicle that owns a 786,000-square-foot IT park in Mumbai, will be in curing India’s exit-starved institutional real estate market, we’ll know shortly.

If you spoke last month to the manager of the fund that owns the SPV, Kotak Realty Fund’s Srini Wasan, he’d have told you he had two institutional investors — one global and one domestic — that have agreed terms to buy the 2008 green field development, now let to global brands such as Accenture, BNP Paribas, Tata Life Insurance and Hewlett Packard, for about $115 million. A deal with one of these parties is expected before the year expires.

Setting botanical symbolism aside for a moment, the willpower behind the completion of this deal is hugely palatable for India’s private equity fund managers, particularly should it end up with Kotak’s global option.

The willpower behind the completion of this deal is hugely palatable for India’s private equity fund managers

A glance at recent research by private equity and mergers and acquisitions monitor Venture Intelligence shows how international funds invested just $183 million into real estate deals last year and just $123 million in 2010 as their investors became turned off by few visible exits in the aftermath of the global economic downturn. India’s real estate, however, is increasingly changing hands, but between Indian buyers and sellers. Indeed, Venture Intelligence counted 22 deals amounting to $864 million happening this year.

Kotak’s Wasan is reintroducing words like ‘buoyancy’ and ‘uptake’ into his vernacular when describing Indian real estate today. Hopeful he may be that his words will help in convincing international capital, his rivals agree a sale of the Peepal Tree IT Park would be welcome. One went so far as saying it would be great for the market, and a “home run” for Kotak. Having purchased the site in 2008 for $47 million using only $18 million of equity from its inaugural domestic fund, the $100 million Kotak India Real Estate Fund, the Mumbai-based firm stands to make quite a profit — between 6x and 8x equity depending on whether it clears up certain title discrepancies, one source familiar with the matter noted.

We could see strong potential new buyers so we upped the price.

Srini Wasan, Kotak Realty

According to sources, there are potentially 18 to 25 foreign direct investment-compliant buildings that would be attractive to overseas investors in India – a surprisingly small number even for a nascent market wrought with restrictions like India. But the restrictions placed on foreign capital entering India real estate certainly play their part. To mention a few: an asset must be an IT park, have more than 10 tenants and be of a certain size. “There are only a handful of buildings that meet these criteria,” Wasan said. “Mine is one.”

Of course, the deal for Peepal still needs to close. Observers said it has been close to being sold before only to fail during negotiations in the past, although Wasan counters that the last party to stall was Kotak itself. A deal to sell the asset at a price that would have been 15 percent cheaper than today’s price was struck only for Kotak to pull out. “We could see the turnaround,” Wasan explains. “We could see strong potential new buyers so we upped the price.”

International investors should note that the sale would be made by Kotak’s domestic fund and not its $280 million Kotak India Real Estate Fund 1, its similarly-named international effort that closed in December 2008. But there is merit in international investors witnessing domestic fund deals. Look at another Mumbai office deal –the purchase in June of a majority stake in the $174 million-valued 247 HCC Park from developer HCC Real Estate by the REIT-like IL&FS Milestone Fund. This deal, labelled a “yield play” by some commentators, surely demonstrates that sales of completed, income-producing commercial assets are happening.

International investors reaping the rewards of a fund commitment is not on this table, but the ability of a domestic fund to exit to an international investor should be treated as the precursor such investors need to become more comfortable with the notion that an investible India lies ahead. Kotak’s Peepal deal and a few others like it need to get done, but if Kotak’s Wasan is correct, we’re nearly, nearly there.