Real estate - USD3bn of PE exits on cards in CY12; Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

We participated in the recently held panel discussion on private equity in Indian real estate Industry, organized by Jones Lang Lasalle (JLL). We believe that funding pressures in the industry will continue for the next 2-3 years as 80% of the PE money invested in India of ~USD11bn over CY06-08 would be due soon for exit. The PE industry itself has witnessed a shakeout, leaving behind serious players whose track record will enable them to counterbalance the overall sluggishness in the industry as well as mounting macro headwinds. Overall, we are cautious on the real estate industry and continue to prefer companies with strong balance sheets and exposure to high visibility rental assets. Oberoi Realty and Phoenix Mills are our top picks.

Real estate to see USD3bn PE exits in CY12, more to follow

Indian real estate industry has received ~USD14bn in PE investments over CY06-11. However, 80% of these (at ~USD11bn) - which came during CY06-08 period - would begin exit from CY12 onwards. The number for CY12 is likely to be USD2.5bn-3bn. Since 67% of the exits till date (at USD3bn) were through promoter buybacks, it is reasonable to expect that CY12 and CY13 may pose significant cash flow pressures for the realty industry if projects do not generate enough cash flows.

Indian investments disappoint with low returns

PE investments in Indian real estate have been a let-down with exits till date recording an average multiple of 1.21x. Further, the industry suffers from negative investor perception with regard to issues like land acquisition and project approvals besides the overhang of renegotiation over India Mauritius DTAA. Some foreign investors opined that China’s real estate market is far more predictable hence a preferred destination.

The panel elucidated that the PE industry itself has witnessed a shakeout with a number of players exiting the market, leaving a few experienced players behind. Till CY07, most investments were beta plays, taking a call on the larger industry itself. However, since then, investors have turned choosy with investments focusing on generating alpha. The panel observed that as CY09 and CY10 were lean years, CY12 may see additional fund raising by the well performing funds.

Investment preference for co-buying of land/ready annuity assets

While CY06-08 saw PE funding across real estate asset classes, CY10-11 witnessed last mile funding for pre-approved residential projects, launched with the assumption of being self-liquidating - a postulation that evaporated soon as buyers trickled down. Going forward, it is expected that capital will flow towards annuity assets and co-buying of land along with developers. Projects under consideration are to the tune of 20-25 acres as opposed to more than 100 acres - considered as unmanageable. Geographically, there is little interest in tier-2 and tier-3 cities as most interest is being confined to MMR, NCR and Bengaluru.