reaping the returns_decoding_private_equity_real_estate_exits_in_india
TRANSCRIPT
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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
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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
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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
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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.
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Private Equity Real Estate Exits in India 5
Major Channelsof FinancingReal EstateDevelopment inIndia
Major Channels of Financing Real EstateDevelopment in India
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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
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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%
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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%
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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
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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 -
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Private Equity Real Estate Exits in India 21
is dependent on Indian savings and
India real estate story.
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22 Private Equity Real Estate Exits in India
Contribution by
Authors
Shashank Narayan Devi ShankarHariharan Ganesan
Ujwala Rao Himadri Mayank Ashutosh Limaye
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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
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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: