Red Fort plans India’s first core real estate vehicle

New Delhi-based private equity real estate firm Red Fort Capital is planning the first investment vehicle in India aimed at generating core returns from commercial real estate, PERE can reveal.

Although the firm that was founded in 2005 by father and son GB and Parry Singh and Subhash Bedi, declined to comment it is believed to be exploring the launch of either an evergreen private real estate fund or a public REIT with a view to selling into it three large office buildings in New Delhi and Bangalore currently valued at approximately $1.5 billion. The properties are held in its first two opportunistic funds, Red Fort India Real Estate and Red Fort India Real Estate Fund II. 

The offices, understood to include Exora Business Park in Bangalore and Red Fort Towers in New Delhi, generate net operating income of approximately $100 million and are occupied on leases averaging 12 years. Those stable core-like characteristics have led at least five large institutional investors in the opportunity funds to seek ways to both retain their exposure to the properties after the funds’ expiration, and retain Red Fort as the manager.

To that end, investors have engaged in talks with Red Fort to design an investment vehicle that can maintain their exposure to these assets. That vehicle could materialise within the next six months. Should the assets be transferred, the investors, including sovereign wealth funds, would need to accept lower than the opportunistic returns which they currently are receiving. 

While Red Fort’s opportunistic funds are understood to have generated IRRs of more than 25 percent, investors that commit to the core vehicle would accept a reduction in IRRs closer to 15 percent reflecting their now-stabilised nature.

The vehicle, which internally carries the working title of ‘REX’, and for which a platform is already being staffed up to manage it, would need to be up and running by the time the Red Fort India Real Estate Funds have expired. The first was raised in 2008 collecting $400 million while the second was raised in 2010 collecting more than $500 million. A third opportunistic offering expecting another $500 million in capital commitments is currently in fundraising.

While the exact form of the offering is yet to be finalised such is the confidence that it will materialise the firm has already appointed two senior executives including a financial and an operational officer, to lead its management. While their early task would be to acquire the properties from Red Fort’s opportunistic funds and then to manage them, it is expected that the incoming vehicle would, at a later stage, look to make further acquisitions of assets from third-parties.

The introduction of an open-ended property vehicle in India continues a current trend of large institutional investors seeking long-dated partnerships in the country with a view to riding out its short-term, often volatile market cycles. In the years immediately following the acceptance of foreign direct investment the Indian government in 2006 more than 180 private real estate deals transacted to the tune of almost $14 billion, according to data provider Venture Intelligence. Many of the investments were made via internationally capitalised, limited life opportunity funds which were caught by a combination of the global financial crisis and immature relationships with local developers and have struggled to make timely exits.

However, those institutions still keen to capitalise on India’s growth story via its real estate have spent recent months tying up longer-term partnerships with select Indian partners. For instance, Dutch pension manager Algemene Pensioen Groep (APG) last year formed a development company with Mumbai-based Godrej Properties for a mid-tier residential development programme. This summer has seen Qatar Investment Authority invest $300 million in a commercial property development platform of Bangalore-based RMZ Corporation and GIC Private and Temasek, sovereign wealth funds from Singapore, commit $200 million to lender Housing Development Finance Corporation for a mortgage programme. ADIA, an investor in Red Fort’s funds, also this summer was reported to have committed $200 million to a fund offered by Kotak Realty Funds, a rival private equity real estate firm.