PE back in Realty form – at an entity level now

Gone are the days when PE players were interested only at a project to project level in their Realty exposures. Now the valuations are beaten down, they seem to be fairly interested in buying stakes in Realty companies instead of specific projects. Clearly their risk perception has come down. Another clue to me is what I see in the rising instances of creeping acquisition. Promoter holding in various companies has been going up sharply. Puravankara Projects and Akruti City have 89.96% promoter holding. If DLF was to go ahead with its entire buyback, it could have one of the highest promoter holding of 89.3%. I get to hear the “buyback” word more now.

Last week I’ve been talking to one of my friends working for a large Realty PE fund. I was surprised when he asked me if I have any interesting proposals from Realty companies. So far his tribe never entertained a hint if it spanned beyond a specific project. I gulped the drink in front of me and ordered another!

Today I read about the resurgence of PE interest in the papers. Now you know why I still call him a friend. He broke it to me two days before!

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At crossroads or just cross eyed ?

Office space rentals have risen 30 per cent in the city central business district Nariman Point and 20 to 25 per cent in Lower Parel in the past year. Leading developers including DLF, Indiabulls, Peninsula and retail pioneer Future Group now are rethinking. Why not convert space reserved for retail malls and hyper markets into large office space…?

But then you have Lakewood malls, the retail arm of Hiranandani (Haiko) zeroing in on supermarkets, lifestyle stores and culture shops as its focus.

An industry at crossroads or is it just cross eyed vision? I'd like to believe it's strategy. But they say, strategy means folding in the future. Not extrapolating the past. Soon we'll figure that out.

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Oligopoly in Indian REITs...?

Inox Leisure investing Rs.100 crore in Ajay Piramal’s Indiareit – for a strategic stake as well as “preferred client status” with a ROFR in its future portfolio of RE assets.

The report quotes Industry analysts view that the alliance will help Inox widen access to upcoming real estate projects across primary tire I and tire II cities, thus getting the right customer exposure to multiplexes and branded outlets. Indiareit could ensure preferential access to Inox for these properties. The new alliance would also bring financial support, expertise, presence of leading brands and strong pre lease to developer.

With a handful of REIT/PE funds with mighty financial muscle and just so few parcels of land available, are we not running into an oligopolistic mess? Has Ajay Piramal been inspired by Sam Zell…?

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Home's where the mortgage is

When Farallon Capital Management, a U.S. hedge fund, and its joint-venture partner, Indiabulls, snapped up an 11-acre property in central Mumbai in March 2005 for $54.5 million an acre, the purchase was called an act of idiocy by local developers. A few months later, when the same joint venture offered $95.5 million an acre for a nearby property, its was the second-lowest bid.

At a time when Indian companies are looking for capital to grow, the recent Finance Ministry guidelines on External Commercial Borrowings (ECB) come as a dampener for most. The official argument for this sudden snap back is that too much money is driving up land prices. It prunes the all-in-cost ceilings over six-month LIBOR for ECB with 3-5 years of maturity by 50 basis points to 150 bps and over five-year maturity, the ceiling is 100 bps lower at 250 bps. It also bans the use of ECB for integrated townships in the fractured real estate sector and worse, it brings preference shares at par with ECB, and to be governed by ECB norms. The total country ECB limit ($22 billion at present) will also be applicable as per this analysis.

Indian companies often buy land banks at huge prices and mortgage it for funding construction cost. Now if the Govt. sets the ceiling on interest rates, the lenders will say “first you folks tell us what you can afford, then we'll have a good laugh and go on from there”….

Perhaps the Government realized its gaffe and the fact that the whole industry runs on layers of mortgage. It has now allowed a breather – albeit with too many strings and a cut off date. In India, we call it roll back....

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