ASIAVIEW: India minus the risk


When PERE bumped into Paul Parker, managing director for Europe and Asia at Landmark Partners, we raised the notion of exploring India for real estate secondaries opportunities.

Mindful that a 55 percent stake in the Connecticut-based fund of funds and secondaries specialist recently was acquired by Religare Enterprises amid promises from the Indian pharmaceutical-turned-financial conglomerate of exposure to a sizeable network of Indian resources and investment, the idea occurred that Landmark might have a competitive edge.

Indeed, Parker had a glint in his eye as though he was one step ahead of our thinking. When the firm closed last month on $718 million for Landmark Real Estate Fund VI, one of the largest dedicated real estate secondaries funds ever raised, he confirmed as much. “The challenge for anybody doing any investments in India is underwriting, and I think one of the key things we’ll have with Religare is people on the ground,” he said. “That kind of resource for our information-gathering ability is going to be crucial for doing the right deals.”

That’s great for Landmark. However, a resource-rich Indian backer, while obviously helpful, is not essential for successful forays into Indian real estate secondaries. The beauty of these investments is that you already can see what you’re buying into. In a country as opaque to international capital as India, such an entry method makes good sense. Indeed, a research report published last month by another global secondaries specialist, Zug-based Partners Group, said as much: “Through structured transactions and secondaries, investors can substantially mitigate the challenges associated with investing in India.”

A resource-rich Indian backer, while obviously helpful, is not essential for successful forays into Indian real estate secondaries

Furthermore, Partners Group has placed its money where its mouth is. In January, it announced the closing of a secondary investment in an Indian mixed-used real estate portfolio. The stigma still associated with publicising secondaries deals meant the firm could say little more, except that the seller was seeking liquidity.  “Partners Group has agreed to [the investment] on preferential terms, which are expected to deliver good returns for its clients,” the firm stated in its announcement. In other words, a meaningful discount to NAV was most likely.

To better illustrate the opportunity in Indian secondaries, it helps to understand where Indian real estate funds are coming from.

Immediately prior to the global financial crisis, India encountered a spate of private equity real estate funds, particularly between the years 2005 and 2007. Predominantly development-focused, as you might expect, these funds made some decent investments and some poor ones. Full-cycle exits remain few and far between, but more apparent today are which funds look likely to return decent profits and which remain challenging. 

As one global GP with a Mumbai office remarked: “Almost everybody underestimated their timelines. The first two to three years of [many] deals in India were lost in approval and land acquisition delays, among [other things]. Doing a secondary means the entry can happen when all those teething problems are behind you and the project is now more predictable.” Unsurprisingly, that GP added: “We ourselves are in the middle of two such opportunities currently.”

Of course, hunting for secondaries in India remains an opportunistic activity and, regardless of potential discounts to NAV on seemingly transparent projects, there is always the danger of overpaying. Vaibhav Rekhi, director of Mumbai-based IndiaREIT, acknowledged the opportunity as “very much prevalent,” but he warned: “There is no organised market chasing these units – transactions are very sporadic at best and are usually the result of a disgruntled investor wanting an exit.” Currently, and very much parallel to India’s primary real estate market, most secondaries in India are transacted between domestic players, such as retail investors, he noted.

There is no organised market chasing these units – transactions are very sporadic at best and are usually the result of a disgruntled investor wanting an exit

Vaibhav Rekhi, IndiaREIT

For that reason, it is understandable if India is a small part of a wider global strategy for those with secondaries remits. Indeed, Landmark’s latest fund is expected to funnel a good 70 percent of its capital into the US, where discounts can be achieved for similar liquidity reasons but against assets with a more assured system surrounding them. It’s hard to criticise that logic.

Still, as has been well-peddled for ages now, India’s growth story – the country’s GDP still oscillates close to the 10 percent mark – will unquestionably endure. Discounts in prime US real estate will not. Taking the time to access India via secondaries could well help install the market know-how for future endeavours while also offering attractive discounts today.

Any real estate market entry whereby risk is mitigated deserves serious consideration. Since meaningful institutional commitments to new funds look unlikely, GPs, fund of funds and even resource-adequate LPs acquiring a still-promising unit with three or so years left to run before realisation sounds like a decent idea to us.