reaping the returns_decoding_private_equity_real_estate_exits_in_india

24
Decoding Private Equity Real Estate Exits in India JONES LANG LASALLE INDIA CAPITAL MARKETS REPORT India Real Estate Market- Growth Poised Private Equity Real Estate Investments in India Exits in Private Equity Real Estate in India

Upload: uday-rajan

Post on 19-Mar-2017

15 views

Category:

Real Estate


0 download

TRANSCRIPT

  • Decoding Pr ivate Equi tyReal Estate Exi ts in India

    JONES LANG LASALLE INDIA CAPITAL MARKETS REPORT

    India Real Estate Market-Growth Poised

    Private Equity Real EstateInvestments in India

    Exits in Private EquityReal Estate in India

  • 2 Private Equity Real Estate Exits in India

    ForewordReal estate industry in India, over the last decade has grown and transformed more than it ever has.

    Among other factors, a wider participation of institutional private equity (PE) investors in the capital

    intensive business beyond the traditional lenders has played a critical role in this change. PE investments

    in Indian real estate have penetrated deep into the industry, with both domestic and foreign funds fuelling

    the rapid growth of real estate construction in Indian cities. The opening up of the real estate (RE) sector

    for Foreign Direct Investment (FDI) in 2005 resulted in transformation of the investment sentiment in the

    country. Multiple investment transactions by both domestic and foreign funds happened in the 2005-2008

    period. With most of the PE funds structured with a fund life of 5-7 years, coinciding with a typical project

    lifecycle, the industry is in a phase that needs monetization of the investments.

    the fund managers in the next round of fund raising and also bring the spotlight on investment grade

    headed in.

    The theme of the whitepaper which is titled - Reaping the Returns - Decoding Private Equity Real

    Estate Exits in India aims to gain and share a perspective on a PE funds exit proposition. With an aim

    to understand the PE involvement in the Indian realty space, this thought piece touches upon the Who,

    Where, When, Why and How of the investment and exit strategies of the PE funds as empirically observed

    over the last 6 years. As advisors to domestic, foreign and listed private equity funds, LPs, lenders and

    developers, and having successfully completed multiple private equity exits, we have tried to incorporate

    Sincerely,

    Shobhit Agarwal

    Jones Lang LaSalle - India

  • Private Equity Real Estate Exits in India 3

    Content

    Looking Forward

    Major Channels of FinancingReal Estate Development in India

    India Real Estate Market-Growth Poised

    Private Equity Real EstateInvestments in India

    Exits in Private Equity RealEstate in India

  • 4 Private Equity Real Estate Exits in India

    Investment Grade Real Estate Under Construction (2Q11)

    COMMERCIAL 40.3 USD billion30.1 USD billion

    Retail 10.2 USD billion

    RESIDENTIAL 119.8 USD billion

    TOTAL 160.1 USD billion

    Residential75% 25% 75%

    Retail25%

    India RealEstate Market -Growth PoisedIndia Real Estate Market - Growth Poised

    value of investment grade real estate in

    Figure 1: Value of Indian Real Estate Under Construction

    1

    2

    1

    2

    to medium term ensuring interest by global

    returns.

  • Private Equity Real Estate Exits in India 5

    Major Channelsof FinancingReal EstateDevelopment inIndia

    Major Channels of Financing Real EstateDevelopment in India

  • Figure 3: Cost of Finance by Various Finance Options

    Figure 2: Major Channels of Financing Real Estate Development in India

    REIT/REMF/ AIF

    IPO IPO IPO IPOPE Funds PE Funds PE Funds PE Funds

    IPO

    Private Lending Private Lending Private Lending Private Lending Private LendingPre-2005 2005-2007 2008-2009 2010-2011 2012F-2013F

    INCREASING TRANSPARENCY

    Average

    35%

    30%

    25%

    20%

    15%

    10%

    Pre 2005

    Equity

    Means & Cost of Financing

  • Private Equity Real Estate Exits in India 7

    Private EquityReal EstateInvestments inIndiaPrivate Equity Real Estate Investments in India

    Regulatory Impact

    to real estate loans and banning lending forFDI regulations for real estate investments

    The private equity funding gained notable momentum during thecrisis of 2008-09 on the back of stringent lending norms set by the

    participants in to the market has also brought in a much disciplinedapproach towards construction and delivery of the projects alongwith better transparency in to the market.

    Figure 4: Sector-Wise Private Equity Investments in India -By Value (2005-2010)

    19%Automotive 2%

    Textile & Apparels 3%

    4%

    4%

    IT & ITES 7% 8%12%

    Real Estate &

    Management 27%

    14%

  • Investment Trend 2005-2008

    to foreign investments a large number ofdevelopers involved in multiple large FDI

    of interest from PE investors as developers

    investment interest from investors out of

    Figure 5: Private Equity Investments in Indian Real Estate -By Value (2005-2011)

    7

    5

    4

    3

    2

    1

    2011201020070

  • Private Equity Real Estate Exits in India

    Investment Trend 2009-2011

    investors.

    were certain ambiguities in the interpretation of the conditions

    Extending the 3 years lock-in requirement to the entireinvestment rather than the minimum capitalization amountor introducing minimum alternate tax on SEZs do not give

    of certain policies. A lot of clarity is required in order to providea more stable regulatory and less onerous platform for boostingFDI investments in the segment.

  • 10 Private Equity Real Estate Exits in India

    Figure 8: India Private Equity Real Estate Milestones

    2011

    2010

    2009

    2008

    2007

    2006

    2005

    1999

    1998

    Road Ahead

    London AIM listingpopular for REDevelopers

    redeemable instruments

    foreign investments

    estate

    Press note 3 onFDI in Industrial

    REMF draftguidelines issued

    Proposed Alternate Investment Funds

    investments and maximum DCF on exits

  • Private Equity Real Estate Exits in India 11

    Exits in PrivateEquity RealEstate in IndiaExits in Private Equity Real Estate in IndiaWhile some fund managersprefer partnering with

    developers with whom they

    of developer track record andexecution capabilities whileevaluating a potential deal.

    Private equity investments in real estate

    available to fund managers and analyse

    Drivers for Exit

    Private Equity Investing is all aboutGetting Out - Anonymous

  • 12 Private Equity Real Estate Exits in India

    Completion of Project Lifecycle

    Market-driven Opportunistic Exits

    Distressed Sales

    Fund Raising Activities

    Completion of Fund Life

  • Private Equity Real Estate Exits in India 13

    Promoter Buybacks:

    Public Market Sale/ IPOs:

    Third Party Exits:

    Sale of GP Interest:

    Trend Watch: The role of NBFCs - While NBFCs have been serious competitors to private equity funds as a

    in 2009. NBFC funding rates were as low as 15-16% p.a until the end of 2010 and have shot to 19-22% p.a in

    Mode of Exits

  • 14 Private Equity Real Estate Exits in India

    The general regulatory / taxenvironment is getting harderfor exits to take place smoothly.For e.g. change in regulation onthe 3 year lock-in period to theentire capitalization (rather thanjust the minimum capitalization)is one of the biggest dampenerto PE exits from the sector.- Mr. Abhishek Goenka, BMR Advisors

    A key regulatory challengeis the 3 year lock-in periodwhich restricts buy back within3 years of investment. Theintention behind lock-in is toensure capital is available fordevelopment and not trading.

    should be permitted to be used

    the 3 year period or otherwise.RBI should restrict only outsidecapital being used to repay theinvestor.- Mr. Sriniwasan, Kotak Realty Fund

    Exits - Challenges

  • Private Equity Real Estate Exits in India 15

    Challenges Key Concerns Impact

    FDIConditions

    approvals

    of partners dispute

    Put/CallOptions

    permissibility

    Lesser ExitMechanismsforCompletedAssets

    PartnerIssues

    CurrencyRisk

    3

    Taxation

    Mauritius.

    Figure 7: Key Challenges and its Impact on PE Exits in Real Estate

    3

  • India has Witnessed USD 3.2 bn4 of Investor Exits Over 80 Deals from the RE Sector in the Last 4 Years

    4.5%5

    Exit by Source of Funds

    Larger Exit Values by Offshore Funds Largely Due to HigherTicket Size

    45Preqin data base

  • Private Equity Real Estate Exits in India 17

    Mode of ExitsHeavy Dependence on Put Options / Promoter Buy Backs for Exit

    Exits by Asset Class

    Residential Focus - A Post Recession Paradigm ShiftFigure 10: Share of PE Exits by Asset Class

    1%

    2%

    1%4% 4%

    4%2%

    7%

    22%

    EntityHotelLand

    PortfolioResidentialRetail

  • Entity vs. Project Level ExitsHigher Preference for Project Level Transactions

    Figure 14: Entity vs Project Level Exits

    Entity Level

    Exits by Geography

    of PE Funds

    Location of Decision Making - A Critical Factor? Figure 13: Share of PE Exits by Fund Manager Domicile

    Number of Exits

    LaSalle Survey

    Foreign

    74%

  • Private Equity Real Estate Exits in India

    Reaping the Returns

    Figure 16: PE Exit Multiple by Asset Class Figure 17: PE Exit Multiple by City

    2.50

    5.004.504.003.503.00

    2.001.501.000.50

    1.40

    1.20

    1.00

    0.40

    0.20

  • 20 Private Equity Real Estate Exits in India

    LookingForwardLooking Forward

    Local Market Expertise and Stable Asset Management Teams will be Valued -

    Direct Investment by LPs or Separate Account Structure -

    Smaller Fund Sizes and Niche Funds -

    Increased Execution Oversight -

    Third Party Exits will Gain Momentum -

    Entry of REITs/AIFs and a New Class of Investors -

  • Private Equity Real Estate Exits in India 21

    is dependent on Indian savings and

    India real estate story.

  • 22 Private Equity Real Estate Exits in India

    Contribution by

    Authors

    Shashank Narayan Devi ShankarHariharan Ganesan

    Ujwala Rao Himadri Mayank Ashutosh Limaye

  • Private Equity Real Estate Exits in India 23

    Ashutosh Limaye Himadri Mayank

    AHMEDABAD

    BANGALORE

    CHANDIGARH

    CHENNAI

    COIMBATORE

    DELHI

    GURGAON

    HYDERABAD

    KOCHI

    KOLKATA

    MUMBAI

    PUNE

    About Jones Lang LaSalle

    About Jones Lang LaSalle India

  • IndiaReit:

    Omkar:

    Rajesh Builders:

    Watermark Residency:

    Phoenix Forever:

    Heinz:

    For handling complexitiesof real estate investments,our clients said,you were a simplechoice

    and over USD 2.5 billion in last 5 years in India.

    Omkar:

    Patel Realty:

    Kotak Realty Fund:

    Paramount Constructions:

    Adarsh Developers:

    Ambience:

    Mafatlal Industries Limited: