Belief that core real estate investing strategies in India can work is mounting. Last month, APG Asset Management, the Dutch pension administrator with approximately €352 billion of assets under management, led a small group of investors in the formation of a joint venture club fund with Xander Group, one of the country’s best-known asset managers. Their plan is to acquire already-built and well-tenanted commercial properties.
The venture, which has been capitalized with $300 million of equity largely from APG and its co-investors, comes just months after the Canada Pension Plan Investment Board (CPPIB), steward of approximately C$201.5 billion (€134.7 billion;
$184.8 billion) in assets, formed a similarly-themed joint venture with Shapoorji Pallonji Group, the Mumbai-based construction and engineering company.
These individual drips are about to form a trickle, reflecting a growing willingness among the world’s biggest institutional buyers of private real estate to take a chance in a country where the property market has yet to widely reward foreign direct investors (FDI). According to Indian markets data provider Venture Intelligence, the two years following the Indian government’s decision to open its doors to overseas capital in 2006 saw almost $14 billion ploughed into private real estate investments, mainly development, predominantly by international equity-infused opportunity funds. A fraction of that money has been returned, prompting a withdrawal by international institutions that was as rapid as their arrival.
Now, a second wave of international institutional buyers has returned, made up largely from groups responsible for more patient capital, such as state investors and pensions, than managers of opportunity funds. Nonetheless, the majority have returned to back the diggers and cranes of development. In contrast, APG’s investment in Xander’s investment pipeline assumes the diggers and cranes have long done their work already – and the leasing agents besides.
Indicative of the lower risk that is inherently taken when buying completed and occupied property, APG is understood to be expecting just 9.5 percent to 10 percent net property income from the venture’s investments. That is markedly lower than the typical 20 percent-plus expectations of earlier international investors that supported development strategies.
Sachin Doshi, APG’s head of non-listed real estate for the Asia-Pacific region, declined to confirm the venture’s return targets. However, he told PERE how its scope for successfully securing core-like deals reached beyond buying freshly completed commercial developments from those whose opportunistic strategies had, for whatever reason, not worked. The venture hopes to buy from established property companies currently experiencing less accommodating capital markets support than before.
“Most developers still regard residential development as their core business and want to keep acquiring land for that,” said Doshi. “Some of them have built quality offices in the past and could possibly look to monetize these assets to continue funding their development business. Others who build offices still may not want to hold longer term, given the lack of permanent financing in India and the higher returns possible from development. Our partner has extensive relationships with groups like this.”
Unlike the opportunity funds in India’s first wave of FDI buyers – and in comparison with other returning institutional investors – APG is not positioning its money in a short-term venture while ceding discretionary control to its manager-partner. The initial tie-up with Xander is closed-ended and expected to run for about seven years, but Doshi said it could be converted into something resembling an open-ended fund. “We’re approaching this by seeing how the opportunities go,” he added.
Perhaps not coincidently, PERE’s first coverage of a core real estate strategy in India involved investments in a closed-ended fund being transferred to an evergreen structure, thereby enabling the same investors that bet on opportunistic returns via growth from development to enjoy the now stabilized assets. Last August, Red Fort Capital, among the most successful of India’s opportunistic property fund managers, set about forming its own core property fund following requests by investors keen not to relinquish their positions in three offices benefitting from full and long-dated tenancy. While that vehicle still is in the works as of press time, it now has been overtaken by APG’s venture with Xander.
Although momentum from investors keen to establish viable core investment platforms in India is gathering, it might have happened sooner. In 2012, Mumbai-based Infrastructure Development Finance Company, led by industry veteran Chetan Davé, conceptualized an opportunity fund that would pick off well-advanced or completed developments from funds needing to exit. Despite his foresight, Davé’s plan never materialized and he has since left the firm. And although successful in corralling rupees, his replacement, MK Sinha, has yet to raise any international money.
As such, when the trickle of international institutions engaging in core real estate strategies in India becomes more of a stream, it will be the ventures of APG and CPPIB that will be cited as where it all began