Track2Realty: The type of marketing strategies that Indian developers employ to sell their products in a tough market may often seem strange to property marketers in other countries. Nevertheless, these marketing strategies are based on a deep understanding of their target clienteles, which are as variegated as the Indian real estate market itself. In India, the aspirational quotient cannot be under-estimated and can often be capitalized upon. Certain add-on offerings – or ‘freebies’ – often appear to have no logical connection to the actual considerations property buyers would have. However, they in fact address well-researched ‘points of attraction’ within their targeted customer base.

This dynamic is especially true in the case of the noveau riche class of buyers, but can apply equally to customers coming from established wealth. In India as in most other countries, a plush foreign car is a valid external manifestation of the level of ‘arrivedness’ that a buyer of a luxury home wishes to portray in the first place. Likewise, gold is a highly accepted and coveted asset of appreciation that appeals directly to the Indian senses. Foreign travel still maintains sufficient glamor to attract attention as a value-added offering packaged into a property deal.

Often, such offerings meet with a level of success that foreign market analysts are challenged to explain. This is because they are pertinent to a highly individualistic national psyche, and are usually played out at times of the year when the country’s property buying sentiments are at their traditional peak.

Not all of these incentives hit the mark, because not every type of buyer can be tempted with ‘freebies’. The Indian middle-class is a highly price-sensitive one, and the current buzzword in this market segment is ‘correction’. These buyers, who are on the market for homes costing between Rs. 35-75 lakh, have an eagle eye on the final bottom line and have been primed for a possible reduction in prices. In fact, such a reduction has been long awaited in the primary cities.

Given the high demand for mid-income homes in cities such as Mumbai, Pune, Bangalore and Delhi-NCR, whether such a correction will come at all is a big question mark. In most cases, developers have the financial wherewithal to stay firm on their official market prices. They see little sense in marking down their price tags and possibly signalling what, from the buyers’ perspective, is a long overdue correction.

The alternative strategy is often to announce incentives. However, because the base pricing of the units in these projects reduces their margins, these incentives tend to be far from extravagant. For instance, a hi-fi sound system or a microwave oven as an inducement to buy a 2 BHK in the suburbs of Mumbai is unlikely to work for a budget-conscious buyer who is more concerned with how much the EMIs will impact the family budget. Freebies only work in the mid-income housing segment if they actually add value to the property or lighten the financial burden on the buyer in some way.

Conversely, the marketing tactic of offering lifestyle-oriented freebies is often quite effective when it comes to high-end premium homes. Thanks to the considerably higher base price and the proportionately better purchasing power of the target clientele, developers can afford to raise the ante on the add-on offerings. In cases where there are two or more luxury home projects of more or less equal attractiveness in a single location, these freebies can become very decisive differentiators. High networth buyers evaluating all available options often respond to the cake with better icing, given that they intend to buy one cake or the other anyway.

Over the last few years, the number of HNI investors and corporates who are seriously looking at investing into Indian office space has increased manifold. Mumbai continues to hold its own as India’s numero uno office space investment destination, with companies from all over the world unerringly zeroing in on the financial capital. As South Asia’s only true financial hub, Mumbai is among India’s best places to invest in commercial real estate. In times of global economic uncertainty, investors flock to markets that have consistently proved their long-term stability and fundamentals.

In a scenario wherein institutional investors are showing reduced preference for commercial real estate in their portfolios, Mumbai continues to present HNI and corporate investors with myriad growth opportunities in office properties. However, the multitude of options also gives many enthusiastic investors heartburn – where on Mumbai’s vast and complex map are the low-risk / high returns locations? Obviously, the lodestone for successful office space investment in Mumbai is market knowledge.

Today, Mumbai as a city for commercial space investment reveals a high rate of vacancies in many locations. The rental yields in these micro-locations are expected to decrease marginally over the next 12 months. While this seems to present a depressing scenario on the surface, the fact is that we are now looking at the bottom of the curve. In other words, these markets are expected to bottom out over the next one year and will consequently start to move up again. These locations have significant long-term capital value appreciation potential, and well-informed investors are keeping a close eye on them.

Mumbai Commercial Property Classified:

• The Central Business District (CBD) which includes the micro-markets of Nariman Point, Fort, Ballard Estate, Cuffe Parade and Churchgate
• The Secondary Business District (SBD) which includes the micro-markets of Worli, Lower Parel, Prabhadevi, Bandra Kurla Complex (BKC) and Kalina, and
• The Peripheral Business Districts of Andheri–Jogeshwari, Malad–Goregaon, Powai–LBS Marg and Thane-Navi Mumbai.

The commercial property investment opportunities vary according to the unique characteristics of each micro-market. At first glance, some of these markets would seem to be places to avoid, given the high vacancies there. However, some of these areas bear closer scrutiny beyond the seemingly obvious.

Data of past trends shows that rentals and capital values in almost all Mumbai micro-markets except Lower Parel and Andheri have either remained stable or gone up over the last 30 months. Many corporates are today migrating from the traditional CBD to BKC and Lower Parel. The motivation behind this migration is the age of the buildings, high rentals, lack of amenities and car parking, safety, maintenance and smaller floor plates in the CBD area.

Over the next two years, the rentals and capital values in Mumbai’s CBD are expected to come down, rendering them more buyer and tenant-oriented for the first time in decades. Meanwhile, the SBD district of Lower Parel is seeing significant demand, given the fact that the rentals and capital values there are less than half of those in the CBD and at Bandra Kurla Complex. Over the next 12 months, the rental and capital values in Lower Parel are expected to bottom out. Commercial properties here are an excellent investment proposition at the current pricing levels.

Meanwhile, BKC is emerging as Mumbai’s acknowledged ‘alternate CBD’, with many banks moving their headquarters there from their erstwhile CBD locations. Capital values and rental values in BKC are expected to go up in the medium term, making commercial properties there a good buy. The limited commercial space supply that BKC will have to address the strong demand over the next two years adds to its investment potential. Bandra Kurla Complex is particularly interesting to HNIs from the diamond industry, given its proximity to the diamond bourse.

• In Andheri, rentals and capital values are not going to improve significantly over the next 18 months, given the high vacancy levels currently prevailing there.
• The Western suburbs of Jogeshwari, Malad, Goregaon and Borivali are seeing healthy and growing demand due to the proximity to employee catchment zones. However, they will not see much rental and capital appreciation either because of the high quantum of existing supply.
• No major changes are expected in rentals and capital values in Eastern suburbs, where demand is keeping pace with supply
• Thane and Navi Mumbai will also remain stable, given the existing supply.

Office Space Investment Guidelines:

• Entrepreneurs who are considering buying commercial real estate for self-use should ensure that the amenities in the project match their business needs
• Investors need to make sure that they study the quality of building, location, demand supply dynamics and yield compression possibility
• The best buildings in each micro-market will always command a premium
• Check the developer credentials, potential for infrastructure development, access to public transport and quality of property management

·         Investors looking at income-producing office assets should look at the break-up of cash flows, the vacancy factor, expenses such as maintenance, property tax and building insurance, lease term, lock-in period and expiry dates,  long term capital appreciation potential and refurbishment, refinancing and re-positioning potential.

One must query the broker on legal issues, the neighbourhood of a property in question, maintenance charges (in case of apartments), water situation, parking facilities, stamp duty rates, registration charges, capital gains issues, construction techniques, and the difference between the built-up area and super built-up area.

You should also check with the broker about home loan rates and the process of obtaining a home loan. A good broker would know about variations and pulse of the market prices within a neighbourhood or across localities. They are also familiar with the reputation of various builders and can help you avoid those who offer poor quality construction and delayed delivery.

Find out if the agent is a member of any local or national real estate association. Does the broker pay service tax? A service tax registration indicates that the broker takes his business seriously.

It is advisable to go to a broker who has an ISO 9001: 2000 certification. Also, a private or limited company is better and corporates and end users prefer them to an ordinary company as such brokers would have had the requisite clearances from registrar of companies and the government of India.

Currently, there is no guideline followed by brokers and there is complete lack of standardization in their processes. For standardization, the broking house can have ISI certification issued by international bodies. But this is not mandatory for broking houses in India.

Identifying a good and reliable broker is the first step in your entry into the property market. However, there are no defined policy guidelines in this highly disorganized business and Track2Realty suggests that one has to be careful judging the intent and credentials of the broker with certain tangible and intangible parameters.

Akanksha Sharma went on a house hunt in Ahmedabad only to keep wondering that how the price of a flat in the same apartment at Sanand can differ so much. With very many flats available it was also not a case of demand-supply mismatch. On a close scrutiny she found out that it was a case of getting into the murky world of property brokers.

Akanksha is not alone in having to face such a dilemma while on a house hunt. Property seekers across the country are regularly subjected to harassment at the hands of the property brokers. It seems while buying a house one has to get into the network of these brokers who in the absence of any defined policy guidelines drive the realty market as per their whims and fancies.

Every house seeker needs a good broker. The problem is how to identify who is a better one. It seems a good broker is something that every home seeker wants and only a few get. Identifying a good broker is half the battle won in your property search as one can then lead you to not only get the right property but also help in the loan process and other due diligence.

But the question is how to identify a good broker? Experts suggest a couple of tangible and intangible parameters on which you can select or reject a broker. First, the very obvious which you can notice by sheer observation-what is the size of the broker’s office, does he have facilities like phone, fax, email, a website. Also, how much staff does he have?

The broker should be accessible and have systems in place so that one can be contacted easily. A proper office demonstrates his commitment to the business over long term. It is a significant positive if a broker has more than one office and the location of his office in a prime commercial centre exhibits his financial muscle.

Next come things which you can inquire of a broker: Since when has the broker been practicing? Experience is an important indicator: Find out about the broker’s knowledge and ability to communicate effectively. A good broker can help facilitate the best deal by virtue of his or her knowledge of the market and save you a lot of pain by helping you navigate through legal glitches. One should also know which are the areas covered under his purview and his network partners, number of partners and areas covered through partners.

The rate at which economy is growing our urban centers shall add at least 100 million people by year 2020 merely on the account of urbanization. To provide housing to so many people India needs to invest a trillion dollars over the next 10 years. This is equivalent to 80 times our education budget allocation for year 2011-12. While in the short-term there are concerns related to over-supply in certain markets the long-term outlook on an aggregate level is positive from institutional perspective.

Valuations is always a concern in a growing economy, India is no different. It becomes difficult to reach a common ground where interests of both investor and seller are aligned. The current environment presents a good opportunity for PE players to get in a deal on reasonable terms. Most of the investments are happening at a project level rather than entity level where PE players are able to secure their investment while eyeing above normal returns.

Finally sentiments for real estate are exemplified by the preference given to it as an asset class which corners more than 50% of the investment bucket of an average Indian national. Current tepidness is a short term down cycle which the sector will come out of as global conditions improve. Larger problems with the sector are in fact related to serious land title issues, long approval cycle, use of malpractices in execution and lack of financial depth in financial intermediaries which need considerable public-private participation to address comprehensively.

Private equity with long term capital is allowing developers to withstand short term cash flow pressures. Despite this being a much more expensive capital than any form of debt, developers accede to it as it allows them to scale up, build professionalism, obtain sophisticated advice and enter new markets. Many a time association of a PE player with a project also adds to the marketability as customer is assured of the financial discipline and corporate governance standards demanded by such financial institutions.

As we look at it, this is a symbiotic relationship which developers have started to appreciate due to reasons other than capital. On the whole it works to the final customer’s advantage who is assured of his investment and product quality, the benefit of which accrues to the project’s bottomline.

It has been a difficult market to be in as a developer. Rising interest rates have impacted the customer interest in new properties moderating the flow of new funds and in addition to that high inflation and rising commodity prices have increased substantially the delivery cost for existing projects. Saddled with pressure to deliver on their previous commitments and fraught with balance sheet liabilities due to financial imprudence, developers are desperately seeking new channels of money.

Traditional funding channels such as banking, public markets have largely become out of reach as financial institutions do not want to increase their already high levels of exposure and public market listings in real estate have performed rather poorly.

With a long term play in mind Private Equity players are keen to capitalize on this need gap. According to reports PE funding into real estate has gone up from USD 480 million in Q1 2011 to USD 504 million in Q2 2011, which are at significantly higher levels when compared to figures for the same period last year.

Professional investors look at combination of three key factors, market opportunity, valuations and sentiments. Long-term opportunity in real estate sector exists and is in the same bracket as the other unfulfilled fundamental needs such as healthcare, education and infrastructure. There exists a huge supply deficit which the country faces today. National Housing Board estimated a shortage of 25 million homes by 2012-13.

]]> http://www.track2realty.com/road-ahead-for-pe-funding-in-real-estate/feed/ 0 http://www.track2realty.com/investing-in-real-estate-private-equity-funds/ http://www.track2realty.com/investing-in-real-estate-private-equity-funds/#comments Tue, 10 Jan 2012 08:15:42 +0000 Track2Realty http://www.track2realty.com/?p=5060 The Indian real estate sector has grown rapidly over the last few years, with its stakeholder profile evolving from locally-focused, privately-owned enterprises to increasingly corporatized, professional organizations funded with public capital and having multiple market and product strategies.

As a result, Indian real estate has seen a considerable flow of capital in recent years, both from foreign and domestic sources. The developer community is adapting to the requirements of joint venture arrangements with institutional capital sources by providing improved transparency and higher professional standards. The preferences of commercial space occupiers (particularly MNCs) as well as residential space buyers are driving improvements in design, engineering and construction quality.

Interestingly, the fragmented nature of the Indian developer community provides scope for Real Estate Private Equity (REPE) funds to source off-market investment opportunities and strategic relationships. This has led to Indian HNIs viewing domestic REPE funds as a preferred asset class for diversified investment. The demand for quality residential and commercial real estate in India is proven and sustainable; presenting investors at many levels with opportunities for income growth and capital appreciation (REPE is not suitable for small retail investors, since the minimum ticket size in most funds is Rs.25 lakhs).

There are many different strategies adopted by PE fund managers. The most common investment strategies include:

• Core investing
• Core plus investing
• Value added investing, and
• Opportunistic investing

REPE funds usually have a five-to-seven year life span. The period includes a two-year investment period where properties are acquired, followed by a 3-5 year holding period where active asset management is carried out. At the end of the whole period, the investors make an exit when the acquired properties are sold.

The typical expenses for such investor include:

• Annual management fees
• One-time setup fees, and
• A performance-based fee (also known as carried interest).

As in all other types of private equity investing, REPE investor have to review their financial condition, investment purpose, risk openness, time horizon, diversification and liquidity needs before making an investment decision. They also need to evaluate a number of aspects of the REPE fund itself. These are:

• Integrity, quality and stability: The integrity of the fund manager and the quality and stability of the management team are extremely important, as are the quality of financial and operating controls, corporate governance and reporting.
• Financial soundness: The investor also needs to evaluate the REPE fund’s overall capital structure, the soundness of the company assets and the sustainability of earnings. The due diligence should include its historical and prospective financial health and the potential returns on investment weighed against the perceived risk.
• Market responsiveness: The fund’s ability to source off-market deals also need to be studied
• Commitment to ROI: The capital commitment by the fund manager and ability to enhance returns with leverage should be evaluated, as also the fund’s cash distribution structure and management fee
• Asset focus and investment structure: The investor should look at the fund manager’s geographic and asset class focus, diversity of the investment structures, methodology for selection, management of JV partners and focus on asset management
• Growth potential: Finally, the growth prospects of the company and its competitive position within the industry should be evaluated.

REPE funds attempt to provide returns independent of traditional asset classes. As a result of the low correlation to traditional asset classes, investments in REPE increase the diversification of an overall portfolio. A typical REPE fund seeks both income and capital appreciation from its portfolio investments, the overall goal being to achieve a gross IRR in excess of 25%. The fund’s manager will seek to achieve returns through several means, including:

• Capital appreciation on land holdings
• Net operating income on real estate projects
• Capital gains from disposal of real estate projects
• Income and capital gains on equity stakes in real estate development companies
• Projects rental yields, and
• Proceeds from financing activities.

The objective of most of these funds is to invest opportunistically in the Indian property market in order to generate sustainable, scalable returns that fully compensate for the inherent risk in the underlying investments. Currently, the leading players in the domestic REPE industry are Kotak, ICICI, HDFC, Indiareit, ILFS, ASK, Aditya Birla, UIOF, Anand Rathi and Milestone.

Cautionary Notes
The history of REPE funds in India is still limited to the first couple of chapters, since real estate itself emerged as an independent asset class only after the Indian Government opened FDI in the real estate sector in 2005. As such, there is still not a lot of research and data available about the performance of the REPE sector in India.

Unlike mutual funds, which generally invest in publicly traded securities that are relatively liquid, REPE funds generally invest in illiquid securities of private companies. Depending on the strategy used, REPE funds will have illiquid underlying investments that may not be easily sold, and investors may have to wait for extended periods before actual redemption.

The portfolio holdings in REPE funds may be difficult to value, because they are not usually quoted or traded on any financial market or exchange.

Some REPE funds may employ leverage as a means to enhance returns, but leverage also increases risk because it magnifies negative returns if investments are poorly underwritten or executed, or if market conditions deteriorate. Other risks include the sizeable entry costs – and, as in any other equity investment, the possibility of losing significant amounts of money if not invested well.

The author, Ramesh Nair is Managing Director – West, Jones Lang LaSalle India

Three major aspects need to be considered while buying haveli properties in India:

• Title of the property:  This is the most critical aspect, particularly since there are likely to be heir-based claims on the property.
• Legal due diligence, particularly from the perspective of the body that has jurisdiction over these properties (such as the Wakf Board) and ascertaining any historical disputes would be essential. These bodies will assist in clarifying the ownership of the property.
• Liabilities related to the subject property: In terms of water and electricity dues, property tax (if applicable), etc.

A regulatory check with the Archaeological Survey of India must be done to establish whether the property can be sold, refurbished and maintained, and what level of approvals and/or NOCs are required from relevant local bodies.  In this context, it would be useful to ascertain if any Government orders have been passed for acquisition or restoration of the property or those like it.

It should be borne in mind that an ancestral property may be a notified heritage site in the centre-specified, state-specified or urban local body list. Potential buyers therefore need to check the applicable restrictions related to such a property’s approved use, redevelopment, refurbishment or any kind of modification.  Moreover, checks also need to be done with the Master Plan of the relevant city and the relevant Town and Country Planning office to ascertain the applicability of laws.

With haveli properties, there are often instances of misappropriation by parties with vested interests. These parties may put in efforts to prevent or delay the sale of such properties by lodging false claims on them, usually with a view to extorting financial gain. Naturally, this causes problems for both the buyer and the legitimate seller.

This is why a detailed legal due diligence needs to be done before considering the purchase of such a property. It is also advisable to conduct a general discussion with residents living around the subject property, as well as the police in whose jurisdiction the property falls, to obtain as much feedback on the history of the property as possible. Such discussions can help indicate potential areas where additional due diligence may be required.

The author, Om Ahuja is CEO – Residential Services, Jones Lang LaSalle India

As mentioned in the previous part of the series, your calculator won’t help here. This is when you need to take a look in the mirror and think about how much time and effort you’re going to be able to devote to the project.

Again, let’s look at the project that you’re comparing against a similar opportunity; another multi-family in the same neighborhood but which requires less work. You’d take that opportunity over the fixer-upper unless the second one offered a considerably higher rate of return. But how much higher?

To starting investors the logical advice is not to err on the side of caution. A project that you can get done is infinitely better than one that has you burned out by the time you’re halfway through it. Find something in your comfort range that offers some decent numbers, get it done, then move on to a more challenging (and hopefully more profitable) project the next time around.

Cashflow, in turn, will allow to calculate the property’s expected rate of return (ROR). Rate of return is a measure of profitability; it measures the cash that a project will generate vis-a-vis the cash that you have to put into the project.

You’ll need a spreadsheet or a real estate evaluation software to calculate this ratio. It’s highly useful because it allows to compare the return one is expecting for the investment vis-a-vis the return one would reasonably expect for other, dissimilar investments. For example, if one runs the numbers for the property described at the beginning of this article and it kicked back a rate of return of 8% I’d surely pass.

One can expect to get 8% investing on the stock market (lower risk, and a whole lot less effort). For the risk and effort one would have to put into this project, expectation surely would be for a rate of return well north of 20%.