research report on strategic finance & real estate in india

1 November, 2012

STRATEGIC MANAGEMENT IN REAL ESTATE

STRATEGIC FINANCE AND REAL ESTATE IN INDIA

Indian School of Business

9th NOVEMBER, 2012

2 November, 2012

Presentation Rollout

1. Real Estate Financing in India : Background

2. Funding Options for Real Estate Industry in India

3. Real Estate Investment Trust (REITs) and Yield Generating Assets

4. Emerging Real Estate Asset Class in India – Demand Driven

5. Discussion

3 November, 2012

1.Real Estate Financing in India : Background




5. Discussion

4 November, 2012

Real Estate : Capital Guzzling Industry

Financing and capital raising availability critical

to all real estate companies, Big / Small /

Global

Availability / Cost / Quality of financing highly

dependent on market conditions

Funding tenure vs project cash flow match is

critical

Flexible corporate structure to enable evolving

financing landscape

Projects have to have flexibility to evolve with

market conditions

RE financing has radically changed post September 2008……..

Indian Real Estate : 2020

• Investment USD $500 Billion

• Market Size USD $180 Billion

• CAGR 25-30%

• Prominent

Sectors

Education,

Residential, Retail,

Healthcare

5 November, 2012

Real Estate (“RE”) Opportunity : India

Commercial 40.3

Office 30.1

Retail 10.2

Residential 119.8

TOTAL 160.1

Investment Grade Real Estate Under

Construction (2Q 2011) (USD Billion)

Source : Jones Lang LaSalle Survey

India; an attractive investment destination

globally

Residential : 2nd most populous country in the

world

Office & Hospitality : Outsourcing boom

Retail & Logistics: Rising disposable income

Healthcare & Fitness : Lifestyle diseases due

to increase in income level

6 November, 2012

Financing options and sources remain limited

inspite of tremendous growth of RE activity in

the country

Government policies and interventions have

also added to scarcity of capital for the industry

Corporate governance, ownership and land

titles make investors skeptical

Corporate structures are historic and complex

….making project level financing challenge in

many cases

Post Lehman era….limited access to global fund flow ….Government desires to control inflation and

is not supporting increased flow from FDI

Challenges for Capital Raising in India

$3

$2

$6

$8

$5

$4

$8

$1 20

52 73

102

36

20

63

39

2004 2005 2006 2007 2008 2009 2010 2011

Capital Raised (USD Billion) Number of Deals

Indian IPO Activity by Year

Source : E&Y Global IPO Trends, 2012

7 November, 2012

Challenges for Capital Raising in India

Banks are stretched as debt remains the most

preferred option for large number of non listed /

regional RE players and high debt portfolio of

listed players

Limited secondary market options

Limited long term capital sources, most capital

providers have 3-5 year rollover mandate

Given complex approval and development

cycles, project development cycles are much

longer than investor mandate

Disconnect of investment spectrum leads to

conflicts, disconnect and failed partnerships

Developers in India are facing serious cash crunch with limited long term funding sources……

$19 $20

$23 72%

66%

68%

2009 Sep 2010 Sep 2011 Sep

Total Loan to Unlisted Developers (USD Billion)

% of Total Developer Loan

Unlisted Developers Account for

Majority of Sector Lending

Source : IDFC

8 November, 2012

Cost of RE Finance Will Remain High in Short to Medium Term

Country

10 Year

Government

Yield (2011-12)

5 Year

Government

Yield (2011-12)

India 8.17-8.93% 7.95-8.90%

Singapore 1.34-1.68% 0.38-0.64%

US 1.43-2.38% 0.56-1.19%

Risk free benchmark rate are quite high

7% - 9% inflation

Currency risk

Industry holding of non yielding assets / lands,

preferred for long term capital appreciation is

high as per global standards putting pressure to

raise more capital for project execution

Unlimited market opportunity in residential with

high margins allow developers to commit

unheard assured returns to PE

Distress debt funding

10 Years & 5 Years Government Yields

9 November, 2012

“Yielding Assets” Vs “For Sale Assets”

“Yielding Assets” “For Sale Assets”

Long term holding with lease period of 7-10

years

Spread / cap rate driven ROI

Global standards on sustainability and design

Maintenance to ensure value protection

Quality of asset is critical to retain and attract

tenants and exit cap rate

Margin over cost, rollover timelines are critical

Quality and pricing is market determined

Market price – input cost is ROI

Market driven specification

Quality to largely create long term brand for

developer

Funding / Corporate structures to align with the asset class………

10 November, 2012

Key Funding Sources in Real Estate : The Last Three Quarters

Private Equity and Debt Remains Major Source of Finance

21

8 8

4

1

PrivateEquity

Debt M&A Non PEEquity

REIT

Deal Volume

$866

$709

$419

$33 $26

Debt PrivateEquity

M&A REIT Non PEEquity

Deal Size (USD Million)

Private Equity accounted for highest number

of deals

However deal size this year was led through

debt financing

Above 50% debt financed for the purpose

of refinancing and meeting working

capital requirements

Non PE Equity investments were majorly led

by secondary market trading

The year also witnessed REIT investment

from Singapore based Ascendas India Trust

Source : VCCIRCLE

11 November, 2012

Private Equity to Remain Major Investment Route

Healthy Investments in Pipeline for the Indian Real Estate

19

3 2

1 1

PrivateEquity

Debt Non PEEquity

REIT M&A

Number of Proposed Deals

$2,032

$83 $296

$93 $19

PrivateEquity

Debt Non PEEquity

REIT M&A

Value of Proposed Deals (USD Million)

Source : VCCIRCLE

Maximum investment expected through the

Private Equity route as per announcements

made in 2012

Big players such as JP Morgan, GIC

Singapore, Morgan Stanley bullish on Indian

market

Residential and mixed use developments to

attract maximum investments

Developers also open to IPOs and FPOs

depending upon the market conditions

12 November, 2012


2.Funding Options for Real Estate Industry in India



5. Discussion

13 November, 2012

Funding Options for Real Estate Industry in India

I. Debt Financing

II. Private Equity

14 November, 2012

10%

15%

20%

25%

Pre 2005 2005-07 2008-09 2010-11 2012-13F

Construction Debt Acquisition Debt Mezzanine Finance

Debt Funding in India

Source : Jones Lang LaSalle Survey

RBI restriction on the use of bank debt for land acquisition

Total accumulated debt of all the Indian real state companies has crossed USD $23 billion

Over-leveraged capital structure of real estate companies has forced the banks to limit their exposer

to the sector leading to increase in the cost of other types of debts such as NCDs and mezzanine

finance

15 November, 2012

Debt Funding in India

Bank Lending:

Secured long term debts (7-10 years)

High rates of interest (10.25%-15%)

External Commercial Borrowing (“ECB”):

Stringent regulations (issued by RBI)

End use restriction – primarily for funding industrial parks

All in cost ceilings (300 bps above 6 month LIBOR incase of maturity period between 3-5 years

and 500 bps above 6 month LIBOR in case of longer maturity)

Non Convertible Debentures (“NCDs”):

Primarily for high net worth individuals

Coupon rates ranges from 13% to as high as 20% with a tenure ranging from 2-5 years

16 November, 2012

Debt Transaction Trends 2012

$37 $13

$58

$414

$345

Deal Size (USD Million)

8 debt transactions in real estate sector

with investment worth USD $866 million in

Jan-Oct 2012

Volume of deals lower than PE deals but

funding raised through debt route greater

Debt transactions in June and July

accounted to 88% of the total debt

transaction

Most developers required to refinance the

project and lower their initial cost of debt

Emaar MGF raised USD $404 million (~47%

of the total debt transaction in Jan’12 to

Oct’12) through private placement to service

and reduce cost of debt

Debt Funding Primarily for Refinancing and Land Payments

Source : VCCIRCLE

$103 $97

$758

Residential IntegratedDevelopment

Refinancing

Debt Capital Flow (USD Million)

17 November, 2012

Funding Options for Real Estate Industry in India

I. Debt Financing

II. Private Equity

18 November, 2012

$1.29

$6.76

$3.31

$0.88 $0.94 $0.86 $0.71

2006 2007 2008 2009 2010 2011 2012*

Private Equity Funding in India

Source : Grant Thornton Investments by Value in Real Estate (USD Billion)

FDI in the real estate sector in 2005 led to a wider participation of institutional private equity

Entry of private equity players was expected to result in disciplined approach towards construction

and project development and management

Major participation from domestic and international funds such as Blackstone, Lehman, HDFC, Kotak

Delayed execution, red tape, corporate governance, organizational inability delayed the exits …and

hence returns

(86%)

19 November, 2012

Private Equity Trends 2012

1

3

6

3 2

1

3 2

PE Deals Volume (Monthly)

$37

$93

$180

$42

$108

$7 $45

$196

Deal Size (Monthly) (USD Million)

21 private equity deals with investments

worth USD $708 million

Deal size dropped 17% in 2012 as

compared to the first ten months of 2011

Policy logjam (GAAR), uncertain

investment scenario, valuation and focus

on exits were the major factors

Major investments were made through

Special Purpose Vehicles (“SPV”) due to

greater transparency, accountability and

ease of exit

Private Equity Deal Volume and Size Goes Weak After Good Start

Source : VCCIRCLE

20 November, 2012


$19 $12

$302

$47 $33 $37 $33 $40

$466

$67 $89

$46

Merrill Lynch Kotak Real EstateFund 1

Deutsche Bank Merrill Lynch IREO HDFC PMS

2007-2012 2007-2012 2007-2012 2005-2012 2005-2012 2010-2012

Value of Entry (USD Million) Value of Exit (USD Million)

12% 28%

9%

5% 15%

12%

Return on Investment, Source : VCCIRCLE

6 PE exit with value of USD $790 million in 2012

All PE exits were through promoter buybacks

The investment horizon is in the range of 2-7 years with average multiple of 2.04 and an average

annual return of 14%

The PE exit for this year is expected to reach USD $1 billion

21 November, 2012


Asset Class Buyer Seller Deal Value (USD

Million)

Commercial Blackstone Embassy Property

Developments $186

Residential Morgan Stanley Supertech Limited $93

Residential Morgan Stanley Sheth Developers $90

Integrated

Development Kotak Private Equity Sunteck Realty $56

Integrated

Development

IL&FS Investment

Managers Indiabulls Infraestate $37

Top 5 deals in real estate accounted for 65% of the total deal value till October 2012…..

22 November, 2012

$411

$112

$186

Residential Integrated Development Commercial

PE Capital Flow (USD Million)

Share of the residential space in private equity investments was above 60%......

Investments in residential space are self liquidating as they offer natural exits through the completion

of project lifecycle

Commercial segment witnessed the largest private equity investment till date in India, wherein

Blackstone invested approx. USD $180 million in Embassy

Integrated developments received minimum capital flow as risk / yield are uncertain


23 November, 2012

Embassy Blackstone Deal Snapshot

Investor Investee Deal Size Asset Class Acquisition Future Plans

Blackstone

Embassy

Property

Developments

USD $180

Million

Pre leased

commercial

space

SPV Level

• Future acquisitions

include lease rental

generating assets

• Investor to act as

investment partner


Exit strategy:

Folding up of multiple entities from Embassy Property Developments and transferring asset

holding to the SPV at India level

Blackstone incorporating 3 holding companies at Singapore level

Singapore holding companies invested for 50% stake in Indian SPV

Indian SPV to list as a REIT, Business Trust or as an IPO in 5-6 years time

Providing exit in a share swap arrangement wherein Blackstone will get shares listed and

tradable on a recognized stock exchange

24 November, 2012

4%

21%

52%

19%

2% 2%

12%

68%

17%

1%

Open Market Sale Project Cash Flows Promoter Buy Back Third Party Exits Others

Number Value

Source: Jones Lang LaSalle Survey

Over dependence on buy backs for exit in last 4 years……

Private Equity Emerging Trends

Lack of price discovery and secondary investors resulted nearly 69% of total exits through promoter

buybacks

Promoter buybacks are more predominant in commercial segments

25 November, 2012

Entity Level

5%

Project Level 95%

Entity vs. Project Level Exit

46%

22%

7%

6%

4%

4% 4%

2%

5%

Residential OfficeMixed-Use Portfolio TownshipHotel LandEntity Retail

Asset Class Exit Break up

Source: Jones Lang LaSalle Survey

Higher preference for project level exit, major focus on residential space……


95% of the total exits reported between 2008 and 2011 comprised project level deals

Post Lehman, 46% of the total exits have been provided by residential assets followed by commercial

office segment

Major reason for this paradigm shift towards residential assets is the ease of exit through project cash

flows and less recession prone asset class

26 November, 2012

Private Equity

Player

Asset Class Under

Development / Developed Property Ownership Location

IREO

Industrial parks and SEZs,

residential, retail and

hospitality, mixed use office

Above 6,000 acre land

bank being developed

Strategic partnership with

Ascendas India Trust

Delhi – NCR, Punjab,

Chennai, Goa, Coimbatore

Tishman Speyer Commercial, residential

Above 2 million SF

commercial space

operational

Development under

process on above 200 acre

land bank

Hyderabad, Chennai

Millennium Spire Commercial, mixed use

office, residential

Approx 1.5 million SF

commercial space

operational

Mixed use and residential

developments under

construction

Delhi – NCR, Coimbatore

First India Real

Estate Capital Fund Residential, integrated

Approx. 450 acre land bank

with residential and

integrated developments

under progress

Bangalore, Chennai,

Nagpur, Ahmedabad

Source : Economic Times


27 November, 2012



3.Real Estate Investment Trust (REITs) and Yield Generating Assets


5. Discussion

28 November, 2012

REIT - Introduction

$528

$90 $60 $50 $49 $42 $42

$20 $8 $8

US Australia France Japan Canada UK Singapore Hong Kong Netherlands Malaysia

Top 10 REIT Markets by Market Capitalization (USD Billion)

Source: J.P. Morgan Asia Pacific Equity Research

A security that sells like a stock on the major exchanges

Invests directly in income generating properties wherein revenue principally comes from rents

Receives special tax considerations and typically offer investors high yields

Also a high liquid method of investing in real estate

29 November, 2012

Emerging Investment Vehicle for Emerging Markets : The India Potential

Property Market Growth Opportunity : Asia Pacific

REIT Opportunity : Asia Pacific

73% 67% 64% 61% 59% 58% 58% 55% 53% 53% 49% 47%

42%

Property Market Growth Prospects (Ratings)

66% 65% 57%

53% 51% 50% 49% 48% 46% 41% 40% 40% 39%

Asia Pacific REIT Opportunity (Ratings)

After China, India offers highest growth

opportunity in the Asia Pacific property

market

REIT opportunity in India limited due to

absence of REIT regime, taxation policy, and

lack of government initiatives to implement

the same

Securities and Exchange Board of India

(“SEBI”) contemplated introducing REIT

regime in 2007 but …….

Singapore listing by three companies with

asset base in India

Source: Baker & Mackinze Asia Pacific REIT Survey

30 November, 2012

REIT‘s Emerging Trends

Ascendas India Trust Entered India in 2007

3.6

4.7 4.8 4.8

5.9

6.9

March 2007(IPO)

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Ascendas Property Portfolio (Million SF)

2012 Returns Weaker than Historical Performance

7.80%

14.80% 12.30%

19.20%

30%

9.25%

AscendasIndia Trust

FTSE ST FTSE STREIT Index

BSESensex

BSE RealtyIndex

12 MonthFixed

Deposit

Comparative Returns (Jan-Oct 2012)

First Singapore listed Indian Property Trust in

Asia with current portfolio spread across

commercial space

Steady growth of business through greenfield

developments and acquisitions of pre leased

properties

However, in 2012 Ascendas India Trust stock

performance weak on account of negative

exchange rate movement

Source: Ascendas India Trust, 2012 Annual Report,

Bloomberg

31 November, 2012

Global REITs India entry strategy….enter the market through fund and test the market first…..


CapitaLand (Singapore)

6 Singapore listed REITs, 15 real estate private equity funds and managing assets worth USD

$25 billion

Established CapitaRetail India Development Fund worth USD $600 million in 2007 with principal

focus to invest in retail properties across India

Current portfolio : 2 malls and 2 service apartments with Built-up-Area of above 3.3 million SF

Mapletree (Singapore)

3 Singapore listed REITs, 3 real estate private equity funds and managing assets worth USD $16

billion

Established Mapletree India China Fund worth USD $1.16 billion in 2008

Primary focus to invest in commercial, residential and mixed developments in India and China

Current portfolio of fully leased commercial space, Built-up-Area of above 2 million SF in India

32 November, 2012

2 3

5 7

15

20 21 21

25 27

31

$1 $2 $6

$9

$19

$23

$10

$25

$31 $30

$38

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

0

5

10

15

20

25

30

35

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Singapore REITs Market Capitalization (USD Billion)

Early Growth Great Financial Crisis Internationalization

Source: J.P. Morgan Asia Pacific Equity Research

Why Singapore…..


Looks very similar to US-REIT market three decades ago and A-REIT market about two decades ago

Proactive and supporting government regime

S-REIT sector consolidation not likely to happen in this decade

33 November, 2012

Debt from

Banks/Institutions Private Equity REIT

Investment

Horizon

• Short term investment

horizon as loan terms are

typically 7 – 10 years

• Short term as private

equity investors achieve

their target returns

between 5-7 years after

which they exit

• Long term investment

horizon with renewal and

rollover options

Balance Sheet

Position

• Balance sheet will look

highly leveraged

• Dilution of equity at lower

rates (primarily in case of

early dilution)

• No impact on balance

sheet as there is no debt

nor dilution of equity

Liabilities

• Obligated to pay even in

case suffering losses

• Requirement to service

interest payment during

construction period

• Re-payment of principal

amount kicks off after 1 –

2 years of disbursement

• Periodic construction

updates

• Private Equity investors

are entitled to receive

dividends on profits

• Obligated to pay even in

case suffering losses,

however rental payment

starts after completion of

construction

REIT Funding : Preferable Source of Financing

34 November, 2012

Debt from

Banks/Institutions Private Equity REIT

Management

Control

• Management control stays

with the company with no

outside interference

• Active role in the company

management

• Equity partners also come

on the Board of Directors

• Management control stays

with the company with no

outside interference

Disclosures

• Primary / secondary

collaterals required - may

require to pledge personal

assets & personal

guarantees

• Financial disclosures

required to be made to

Private Equity investors at

regular intervals

• Financial disclosures

required for the purpose of

underwriting

Tax Shield

• Tax shield for the period

when the interest

payments

• No tax shield

• Tax shield on the rental

payments for the complete

lease period

Asset Position • Ownership of assets after

repayment of loan

• Ownership of asset if

investor sell back the

stake

• No ownership of asset

Transaction

Cost

• Several additional charges

– Processing Charges,

documentation charges,

inspection charges etc

• Payment of management

fee to PE investor (ranges

around 1.5% - 2% of

investment made)

• Initial interest free,

refundable security

deposit

REIT Funding : Preferable Source of Financing

35 November, 2012

Yield Based Assets - REITS

Emerging Products Traditional Products

• Innovation Parks • IT Park

• Hospitals • Office Space

• Medical Office Building • Malls

• Retail Boxes • Logistics / Warehousing

• Highway Malls • Hotels

• Young Housing • Education

• Housing for Aged

• Metro based Real Estate

36 November, 2012

Strategic Funding Options

Funding Options Developers

International Developers

• International listing of Indian assets

• Global debt on portfolio including non India

assets to keep debt cost low

• Ascendas

Indian National

Developers

• Split yielding / for sale assets into strategic SBU

• Yielding assets list on international exchange or

roll it up in an existing entity

• For Sale assets – Indian IPO is a good option

• DLF

• Embassy

Large Regional

Developers

• Identifies long term focus (yield player / for sale

player)

• Product and market focus

• Oberoi Developers

IPO

SME Developers “For

Sale Assets”

• Private Equity / Debt mix in proportion

• Simple SPV corporate structures

• Size /scale which supports execution

SME Developers “Yield

Assets”

• Engage HNI’s in asset specific transaction

• Plan asset sizing to facilitate transaction

• Stabilization timeline

• Ascendas – Phoenix

transaction

37 November, 2012




4.Emerging Real Estate Asset Class in India – Demand Driven

5. Discussion

38 November, 2012

Asset Class Products

• Commercial Medical Office Building,

Hospital, Education

• Residential Rental Housing

• Industrial Specialized Warehouses

• Retail Big Box Retail

Emerging Real Estate Asset Class in India

39 November, 2012

Medical Office Building

$158

$100 $110

$66

$4

$94

$27

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12

Private Equity Investments in Indian Healthcare (USD Million)

Excluding PE Deals with undisclosed investments

Source: VCCIRCLE

Day care centers catering to local, foreign and corporate healthcare needs

Complemented with shopping centers and restaurants

Predominantly present in US, Europe and developed countries of Asia Pacific such as Australia,

Singapore, Hong Kong

Rising healthcare needs and increasing affluence in India can make Medical Office Buildings the next

real estate product

USD $800 Million, Fresh Growth Capital Infused into Healthcare in 2012

40 November, 2012

Indian Healthcare Industry Growth Drivers

$60 $68

$78 $90

$104

$120

2010 2011 2012E 2013E 2014E 2015E

Indian Healthcare Industry Market Size (USD Billion)

270 320

360 410

460 520

2010 2011E 2012E 2013E 2014E 2015E

Number of Medical Tourists in India ('000)

18.5% 81.5%

Lifestyle Diseases Others

24% 76%

Lifestyle Diseases Others

Market Growing at a Rate of CAGR 15% Annually By 2015, India’s Medical Tourism Market to be USD $2.1 Billion

2001 2012 E

India will need to Develop Facilities for the Treatment of Diagnosis with Increasing Lifestyle Diseases

Frost & Sullivan India Healthcare Report

41 November, 2012

Emerging Formats in Indian Healthcare Sector

Single Specialty Centers

Disease Operating Margin (%)

Cardiac 25 - 30%

Orthopedics 25 - 30%

Ophthalmology 22 - 25%

Oncology 18 - 20%

Outpatient Surgery Centers

Disease ALOS* (%)

Cardiac 25 - 30%

Orthopedics 25 - 30%

Ophthalmology 22 - 25%

Oncology 18 - 20%

*ALOS - Average Length of Stay

Differential operating margins driving

demand for single specialty hospitals

70% of surgeries can be performed in

outpatient surgery centers

Surgery expenses are 15 - 30% lower than

multi -specialty hospitals

42 November, 2012

Investment Potential for Real Estate in Indian Healthcare Sector

Year Required Urban Bed Addition

by Private Sector

Cumulative Healthcare Space

Addition

Cumulative Investment

Potential

2013 95,000 70 Million SF USD $8.7 Billion



• Assumed cost of hospital building structure - USD $70/SF

• Assumed cost of land - USD $1 million/acre

43 November, 2012

Questions & Discussions

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