Cushman & Wakefield’s man in Mumbai, Sanjay Dutt, talks to Sophia Furber about the Indian property market and explains why the days of the “real estate investment tourist” are over
“A holy pilgrimage land.” This is the phrase Sanjay Dutt, Cushman & Wakefield’s south Asia managing director, uses to describe the way overseas property investors viewed India in the boom years of 2005-07.
Those were the heady, pre-crisis days. The days when the bulk of his time was spent presenting to some of the world’s biggest private equity players – taking them on road trips around India to get a flavour of the country’s real estate markets. “We nicknamed them ‘REITs’ – real estate investment tourists,” he smiles.
And why not? Back then, REITs in their traditional guise didn’t even exist in India and so the play on words didn’t cause too much confusion.
But things are changing fast. The Securities and Exchange Board of India published draft REIT (think trust, not tourist) guidelines in September this year that are expected to be implemented after the 2015 budget. As a result, companies with seed assets of Rs5bn (£51m) will soon be eligible for REIT conversion, and would be allowed to invest 90% in completed, income-generating properties, and 10% in development.
And it is this major leap forward in Indian real estate legislation that is starting to attract the serious investment players.
End of the tourist trail
These “investment tourists” Dutt refers to were part of the problem that led to India going from being the darling of international private equity up to 2007 to a dead zone for cross-border transactions by 2008. The flow of private equity investment into Indian property slowed to just $670m (£425m) last year, compared with $6.8bn at the peak of the market in 2007.
To a degree, this was as a direct result of overexuberant investors with a disregard for local knowledge, which ultimately led to what Dutt describes as a “disconnect” in valuations. Very few foreign funds set up offices with local property professionals, or even sought advice from local consultants.
“At the peak of the market, a lot of overseas investors were acting for themselves rather than using an agent, and then simply running decisions past their investment committees, making many investments a matter of chance. This time around, however, people are more prudent, and they are willing to pay for advice – good news for the property services firms like us. We are moving to a more advice-led culture here.”
Even sophisticated overseas investors showed a degree of naivety when pairing up with local firms, Dutt believes.
“The first outing for most funds was with second-tier developers, new entrants or new entrants in SEZ/IT parks or hotels or shopping centres, many of which were not experienced in the segments or new cities that they ventured out to. Either that, or they had not built professional organisations.”
Rebuilding trust
Now major global investors are circling the market once more, as the economy is on the rebound with 5.5% growth in Q3, while the commercial property market is near the bottom of the cycle. Delhi office take-up is at its lowest level for nine years, but is poised for a comeback, while office yields in some markets are more than 10% – but expected to sharpen.
“The international real estate world is exploring India again,” says Dutt. “They may not be committing big bucks yet, but they are exploring opportunities. Sovereign wealth funds are also looking seriously at India now. They weren’t really active in the market last time around.”
Among these is GIC, a Singaporean fund that signed a $248m deal in September with Indian developer Brigade to develop property in southern India. The Abu Dhabi Investment Authority put $200m into property funds run by Hines India Real Estate in December last year – following on from a $300m investment into Kotak Realty Funds a few months earlier.
And the good news is that the new REIT legislation is likely to mean that this time around much of the overexuberant heat is taken out of the market from the off, as more transparency will promote a more restrained approach to debt on the part of the developers and investors.
Cushman & Wakefield’s research team predicts that REITs could be a conduit for as much as $12bn of new investment in the real estate sector in the first three to five years after the legislation comes into force.
A number of heavyweights have expressed interest in REIT conversions: Blackstone is mulling a REIT conversion with its joint venture partner Embassy Realty, and Developer DLF, one of India’s largest investor-developers, with 28m sq ft of Indian commercial space under management, is also eyeing a conversion.
“We are moving to a phase of more institutional and public market participation. A lot of developers will be consolidating their assets this year in preparation for REIT conversions,” says Dutt.
However, he does sound a note of caution in the midst of his positivity: “I just hope it does not become like the IPO rush we saw a couple of years ago. Some companies just were not mature enough to become publicly traded entities at that time.” Indeed, the years preceding the crisis saw a spate of listings, with a total of 11 Indian funds listing on AIM in 2006 alone.
But the overarching message here is that Dutt is optimistic about the future – as long as foreign investors behave like serious students of Indian real estate, rather than tourists.
