“Expecting Surge in Real Estate Investments”

Azure Capital Advisors is the newest entrant in Private Equity for the Real Estate in India. The company plans to invest around Rs. 600-750 crore in various projects. Alok Kumar Singh, Executive Director (Strategy & Head of Fund Operations) speaks about his business strategies and shares an in-depth analysis on PE investments in real estate sector
 
Brief us about your business and recent achievements.
Azure Capital is a Private Equity asset management firm with a focus on the Indian real estate sector. We floated our maiden fund, India Realty Fund-I, with an objective of raising between Rs. 350-500 crore. The fund has achieved its first closing by end Oct 2010 and raised approx Rs. 50 crore and thus seen good response from retails & HNI investors. On the investment front, Azure is evaluating several very attractive investment opportunities in Bangalore, Mumbai, Pune, Chennai and Hyderabad with a combined business potential of more than Rs. 1500 crore.
 
Through Azven Realty, a wholly owned subsidiary, Azure has developed end-to-end capability and an ecosystem of partners to manage execution of real estate projects. This offer’s Azure’s investors a unique investment model where their investments are closely monitored in all cases and self-developed in many cases, thereby generating higher returns or the fund. Currently Azven Realty is managing a 75 acre villa development project funded by an international investor. Azven operates on an arms length and non exclusive basis vis-à-vis Azure with the highest standards of corporate governance.
 
Which are the other key players in PE sector who are also focusing on investments in the real estate sector? How will Azure’s approach be different from other players?
The Real Estate PE sector can be broadly stratified into:
•      Funds promoted by institutions like ILFS, HDFC, Kotak Mahindra
•      Funds promoted by leading business houses like Aditya Birla Group
•      Funds promoted by developers like Unitech and India Reit
•      ‘Pure play’ funds such as Red Fort Capital, IREO etc.
 
Azure has positioned itself as an execution led real estate focussed AMC with an end-to-end capability of executing residential projects across various geographies. Along with this, Azure brings a strong network in the knowledge sector companies throughout the country, thereby offering a unique investment model for the investors.
 
Where do you think the PE sector is headed in India?
I will answer this question with a specific reference to the real estate sector. In recent times the real estate sector in the country has seen some dramatic changes that affect the way this business is done like increasing size of projects, general uptrend in real estate prices & costs, fluctuating sales & collection cycles in residential projects owing to business cycles, mid-term over/under supply of commercial real estate, stagnating rental realizations, increasing land prices, refinement of taxation laws, etc. All these will make real estate business more and more capital intensive. Further, the draft guidelines of the proposed real estate regulator indicate towards higher security deposits thereby increasing the capital requirements to initiate projects.
 
On the demand front, based on various estimates, it has been acknowledged that India has a shortage of more than 25 million housing units, which is going to worsen further because of increasing urbanization. The sector therefore has to supply houses but is starved of ‘organized’ capital. Banks are reticent to lend to realty companies due to higher provisioning norms and to avoid creating an asset bubble. Real estate development companies have also not acquitted themselves well and there are serious governance issues. Raising money from the public is therefore out of question for a majority of developers. Hence, PE funds fill this gap in not only creating development but also in the process ‘professionalizing’ the sector. Further, to support a double digit growth, the country will need increasing volume of commercial and retail space.
 
These factors when coupled with the increasing corporatisation (though at a slow pace) of Indian real estate companies, will lead to more and more PE requirement in the sector towards narrowing the demand supply gap.
 
Does India as a developing country attracts more PE investments in Real estate?
India as a developing country has increasingly attracted more and more PE investment in general and specifically in real estate in the last 10 years. A major part of the PE investments comes in the form of FDI which currently stand at US$ 145 billion cumulated from 2000. Real estate has a healthy 7 per cent share of all FDI investments coming into the country.
 
PE investments in real estate are likely to give healthy risk-adjusted returns to investors. Also, with the guidelines around setting up of REITs hopefully getting formalized in the coming years, new models of institutional investments into real estate will open up.
 
As said earlier, we see the demand of PE investments in real estate sector increasing going forward and its share in the overall PE investments also going up.
 
What are the major constraints in the growth of real estate investment in India?
In my view, major constraints in the growth of real estate investment in India are:
•      High transaction costs – stamp duty & registration costs
•      Complex taxation laws – low levels of clarity on extent & time of applicability of various taxes like VAT, Service tax, long term capital gains tax, short term capital gains tax, income tax, etc.
•      Lack land reforms – who can own land, how much, what kind of land agricultural / converted, etc. This leads to artificial scarcity of developable land thereby increasing the price of land
•      Lack of consistency of approval system – all states have different procedures for approvals of different kind of projects making it difficult for funds to invest across multiple states
•      Low levels of professionalism in the sector – real estate sector in India is largely unorganised and has not been given the industry status as of now.
•      Unfavourable debt funding norms for real estate – Since the sector does not have an industry status, the norms for debt funding to sector keep changing based on short term policies thereby making the sector even more cyclical.
 
Is real estate investment in India safe?
Real estate investment, if done in robust entity and financial structures are one of most safe investments. For example in most of the investments by real estate funds are now done in projects developed and managed under special purpose vehicles (SPVs) where the funds can exercise a high degree of control through adequate levels of equity holding, board representation with affirmative rights and appointments for some of the key positions like CFO, etc. This ensures that the investments are into asset backed project with complete ring-fencing of risks thereby making the investment safe.
 
Which are the major cities under your radar? Can you throw some light on your future projects?
We are mainly looking at high growth cities in the Southern and Western states of India including Bangalore, Mumbai, Pune, Chennai and Hyderabad, especially where the knowledge industry is expected to maintain robust growth rates in coming times. At the moment we are working on two villa/row-house projects in Bangalore, one apartment re-development project in Mumbai, one city-centric mixed use development project in Pune and a large plotted development project in Chennai.
 
Today, your business is much focused in real estate sector. Do you have any plans of capitalizing into commercial property as well?  
We are staying away from pure play commercial project for the time being. The only exception would be where there is a commercial component as a part of a larger residential project. Even in such cases, the exit for our fund would be through the residential component.
 
As of now, what is your total investment in Indian market? What are your targets for next two years?
We are in the process of making investments at this time. Over the coming two years, we expect to invest around Rs. 600-750 crore in various projects.
 
What about bringing liquidity in your business?
Since we are a fund, liquidity comes from the capital commitment made by our investors upfront. On an ongoing basis, based on the capital requirements of the project portfolio, we draw down capital from the investors periodically thereby maintain adequate liquidity in our funded projects. Further, once our projects are adequately equity-funded, the projects can, if required, raise debt from various
financial institutions.
 
India as a developing country has increasingly attracted more and more PE investment in general and specifically in real estate in the last 10 years. A major part of the PE investments comes in the form of FDI which currently stand at US$ 145 billion cumulated from 2000. Real estate has a healthy 7 per cent share of all FDI investments coming into the country

2