India’s private equity real estate sector is on the cusp of a second generation of opportunistic investment vehicles. The first revolved around creating institutional-grade assets but, given lacklustre results, some firms are striking a different tone this time around as they pitch to international investors.
Chetan Davé, real estate veteran and head of Infrastructure Development Finance Company’s (IDFC) recently launched real estate investment platform, has spent the past 18 months or so fine-tuning his new employer’s first approach to the market.
IDFC manages about $1.3 billion in private equity funds and a further $1 billion in an infrastructure fund, but it took no part in the real estate space in the first years after the Indian government permitted foreign direct investment in 2005. As such, the firm has no legacy issues. With the support of a newly hired team and enthusiastic sponsor, Davé is preparing an investment strategy that he expects to herald investments of more than $1 billion in the coming 12 to 18 months.
Today, the platform is investing its sponsor’s equity as it builds a track record ahead of courting external capital for a debut commingled investment vehicle. “We have a long-term approach and will be patient,” Davé said. “If it takes a year, no problem. If it takes longer, also no problem.” 
Enough has been built that I think there is room for a strategy like this, where one can accumulate a diverse portfolio of income-producing assets.
Chetan Davé, IDFC
IDFC is adopting a dual approach to India, underlined by a more moderate approach to risk and return than previously was adopted by other firms. While many of India’s first generation funds were focused on developing the country’s first batch of institutional-grade property, IDFC is expecting to be among the first to buy it in or around the point of completion and, most importantly, when it already is earning.
“Enough has been built that I think there is room for a strategy like this, where one can accumulate a diverse portfolio of income-producing assets,” said Davé. “You do have risk, but only associated with the market and ownership. Not greenfield development risk.”
In December, IDFC completed its first investment: Galaxy Mercantile, a company of New Delhi-based DLF, which owns a 1.3 million-square-foot IT park in the Noida industrial township, located southeast of New Delhi. IDFC paid an initial Rs200 crores (€28.86 million; $37.6 million) for the asset. Further investments are expected from across India’s seven largest commercial property markets, which include New Delhi, Mumbai, Bangalore, Hyderabad, Pune, Kolkatta and Chennai.
Davé still expects IDFC to garner opportunistic returns from its investments, but he pointed out that, having avoided the risks attached to development, prospective investors must accept a lower return. “The chances we make more than 30 percent IRR would be low, but the chances we make less than 15 percent also would be low,” he said.
IDFC’s plan to capture India’s income-producing real estate was applauded by certain peers, although some disagreed there was enough supply to justify IDFC’s heavy emphasis. Pointing to other firms, including The Blackstone Group, which recently acquired two income-producing properties in India, one rival GP said: “It’s not a bad time to look at this space, but the issue is there are very few assets for them to buy. Also, that space is becoming crowded.”
The second part of IDFC’s dual strategy has a far larger scope for scale, however, and continues the well-trodden path of development, particularly residential. Of less relevance to international institutions, IDFC expects this strategy to be popular with its less risk-averse, domestic clients. “This is not about being unavailable to international capital,” Davé said. “It’s just that, with domestic capital, I can do things within the capital structure and the shareholder agreement to mitigate risk that I am not able to do within a foreign direct investment.”
Indeed, the flexibility afforded by positioning IDFC’s development strategy as most appropriate for domestic clients was again aimed at mitigating against unnecessary risk, Davé noted
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