research report on strategic finance & real estate in india
DESCRIPTION
Prepared research report on Strategic Finance & Real Estate in India presented Indian School of Business (ISB, Hyderabad) on November 9th, 2012. The report consist of real estate trend in India in the year 2012. Comparison among the various funding options available for real estate development in India. REITS operation in India and discussion about yield generating assets. Emerging real estate asset class in India.TRANSCRIPT
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
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
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
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
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
Private Equity Trends 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
Private Equity Trends 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
Private Equity Trends 2012
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
Private Equity Trends 2012
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……
Private Equity Emerging Trends
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
Private Equity Emerging Trends
27 November, 2012
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
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…..
REIT‘s Emerging Trends
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…..
REIT‘s Emerging Trends
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
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
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
2015 179,000 140 Million SF USD $15.2 Billion
2017 296,000 230 Million SF USD $25.5 Billion
• Assumed cost of hospital building structure - USD $70/SF
• Assumed cost of land - USD $1 million/acre
43 November, 2012
Questions & Discussions