Unending demand

Indian property funds have popped up everywhere recently, but some are speculating that the flow of investment into India could slow down. with all the capital that's yet to be invested, one wonders whether that may be a good thing. By Dave Keating

Anyone who thought fundraising for Indian real estate might cool in the second half of the year has had to think again. The month of September saw a virtual monsoon of new private equity vehicles dedicated to Indian property blow into the market. Many of these are backed by foreign capital.

Last month, Mumbai-based housing lender HDFC closed its first real estate fund for international investors. The firm raised $800 million (€587 million) from 28 foreign investors, making HDFC the largest private equity real estate player for the moment in India. The same week, Mumbai-based real estate fund Indiareit said it would unveil a $750 million overseas fund by the end of the year. A short time later, reports in India indicated that the private equity arm of finance company IL&FS is close to launching a $1 billion Indian real estate fund; that firm had already partnered with Milestone Capital Advisors earlier in September, launching a fund to raise $248 million for leased or rented properties. Similarly, Actis Advisors is reportedly planning to launch its first India-dedicated fund with between $250 million and $300 million in dry powder, which will run alongside a $3 billion to $4 billion global fund that will have a $1 billion allocation for India.

Some market observers are starting to question whether this level of inflow is sustainable in the face of the global credit crunch. Although the increasing trouble in the Western property markets could make opportunistic investors flee to the rosy outlook of India, the credit tightening could also make investors more risk averse.

For sure, September was a busy month.

Since India loosened its rules limiting foreign investment into the country's real estate in 2005, India-focused private equity real estate funds have just gotten bigger and bigger. According to Indiareit, real estate funds focused on India have attracted about $3 billion so far, and the firm estimates that as much as $10 billion in overseas funds will be allocated to India in the coming two and a half years. Moody's Investors Service said in June that the Indian real estate industry as a whole may grow to $90 billion by 2015, from just $12 billion in 2005.

But compared to the mammoth amount of money being raised, actual investment activity in India has been rather restrained.

There have been some notable recent investments, such as the Starwood Capital and Walton Street Capital partnership to develop a $1.25 billion, 20-million-square-foot township in Kolkata. But much of the capital earmarked for India has yet to be deployed. While capital formation for Indian real estate investment has surged, deal activity is up only modestly. According to Dealogic, $771 million worth of targeted real estate M&A deals were completed in the first three quarters of this year, just a slight rise from the $468 million spent in the first three quarters of 2006. Unless the investment pace accelerates, the India fund managers are going to have a hard time justifying the increasing amounts of capital under management.

Some market observers are starting to question whether this level of inflow is sustainable in the face of the global credit crunch. Although the increasing trouble in the Western property markets could make opportunistic investors flee to the rosy outlook of India, the credit tightening could also make investors more risk averse.

Nicolas Berggruen, the founder of US investment firm Berggruen Holdings, told Reuters last month that international funds may change their tune toward India if the global situation gets much worse. “These funds, if they are hit at home, they will be more cautious abroad and they will have less resources, less time, less money if they are hit by the global liquidity crisis,” he told the news agency. “The fact that you had such a rush to invest here and maybe too easy money here in terms of equity, debt, etcetera, you may have a slowdown of that.”

Not everyone expects a global hiccup in the real estate finance market to have much of an effect on India. Aniruddha Joshi, executive vice president of Indian real estate investment company Hirco, says scramble for assets in India will likely continue unabated regardless of the activities of international players. An old hand in the world of Indian real estate, particularly in the development of townships, Joshi says real estate demand in India is so intense, it limits the perceived risk of investing. He also said the fact that you can always borrow money locally makes India relatively immune to the wider squeeze. “The credit markets in India have the advantage of being under-developed,” he said. “You don't have securitization of debt, so people have been much more diligent about evaluating credit risk.”

These are good times indeed for owners of Indian property, but nervous times for people buying into this booming market.

Starwood, Walton in $1.25bn Indian development
US private equity firms Starwood Capital and Walton Street Capital are partnering with Indian property developer Shriram Properties to develop a $1.25 billion (€900 million) township in Kolkata, India. The three firms will each own a 33 percent stake in Bengal Shriram Hi-Tech City Private, the special purpose vehicle to develop the integrated IT township and auto park on the former site of Hindustan Motor's Uttarpara plant in West Bengal. The township will include residential, retail and commercial real estate properties. Hindustan Motors will retain about one percent stake in the project. Construction of the project should begin within nine months and will be completed in six years.

Oaktree buys Pangaea
Los Angeles-based investment firm Oaktree Capital Management plans to buy Singapore-based Pangaea Capital Management to lead its real estate efforts in Asia, the firm has announced. Terms of the deal, which would give Oaktree access to a healthy pipeline of property deals in Asia, were not disclosed. Pangaea, a two-year-old special situations firm, has 25 employees across Singapore, Shanghai, Seoul and Tokyo. Two-thirds of Pangaea's investments are focused on the real estate sector, specializing in distressed debt, unbundling property from corporate structures, securitizations and direct property holdings and developments. The company invested $1.2 billion in 2006 and an additional $800 million so far this year. The company's chairman and founder, Robert Zulkoski, will become Oaktree's managing director and head of real estate in Asia.

CapitaLand sets up second China fund
Singapore property developer CapitaLand has set up its second Chinese property development fund, having raised S$900 million ($600 million; €439 million). CapitaRetail China Development Fund II will invest in retail mall development projects in China. CapitaLand will hold a 45 percent stake in the fund, with the remainder being held by institutional investors. The firm's first fund investing in Chinese malls, CapitaRetail China, also raised $600 million for development and is now more than 90 percent committed. CapitaLand has also sponsored the S$638 million ($425 million) CapitaRetail China Incubator Fund to invest in warehouse retail properties.

Goldman and Ethos make South African casino bid
Ethos Private Equity, one of South Africa's largest domestic buyout firms, and Goldman Sachs are heading a consortium to buy South African casino company Gold Reef Resorts. The consortium has launched a fully funded bid of R11.4 billion ($1.5 billion; €1.1 billion) for the casino group. Ethos, which last year raised one of South Africa's largest dedicated private equity funds with $750 million in commitments, is leading the bid alongside investment and real estate funds managed by Goldman Sachs, as well as the Black Economic Empowerment group, the program launched in post-apartheid South Africa to allow previously disadvantaged groups to participate in economic opportunities. The investment is Goldman Sachs' first private equity investment in South Africa.