Global Commercial Real Estate to Touch $300-bn Mark

Reflecting improved investor confidence, investment in commercial real estate globally is expected to witness a “healthy” growth of 40-50 per cent to $300 billion in the current year, says a report. According to the report by global real estate services firm Jones Lang LaSalle, the first half of 2010 saw investment worth $130 billion in the commercial real estate globally and is likely to touch $300 billion in the full year, representing an increase of 40-50 per cent from 2009.

“The first half of the year showed that confidence has improved and momentum has increased. While markets across the globe are strengthening, the last few weeks have shown that regional markets are moving with different dynamics,” the report noted. In the commercial real estate market, the quickest recovery was seen in the Asia Pacific. Europe lagged behind, where the investors still seem more hesitant, due to sovereign debt and austerity packages concerns, followed by the US, which had a slow start to 2010, but investment markets are picking up with the stabilised market fundamentals.

While, the rental markets are still to catch up in Asia with the improved market sentiment, the rental growth is expected to make a comeback in few European markets over the second half of 2010 and 2011.

Investors Trust Real Estate Industry over MF’s

The rich rarely admit when they lose money. Often it’s too little to matter. More often, they are too proud to tell the world how wrong they were. A client, who asks a private wealth manager to handle Rs 50 lakh, may change her banker if the man fails. But she is unlikely to write a letter to the editor, or drop a mail to regulators — things that angry mutual fund investors often do. Better known as HNIs, these investor’s fish for ‘sophisticated’ products that appear smarter than stocks or bonds.

Over the last four years, more and more of them have been drawn to properties. They don’t get into cash deals, broker-dealings and paper work — the messy side of real estate transactions. Instead, they ask real estate fund managers to grow their money. Their message to fund managers is simple: “first, don’t buy listed stocks, go for unlisted builders; second, pick those property firms with projects in Mumbai and Delhi, the hottest markets.” Around 15 local real estate funds are today managing Rs 10,000-12,000 crore. That’s as big as the portfolio management business of stock brokers.

Like PE players, their more glamorous neighbours, the property firms offer a hurdle rate of return to investors. Simply put, this means that the fund has to generate a floor return, that varies from 8-11%, before it can claim a slice of the profit. This return (which isn’t guaranteed) goes to investors and anything above it is shared in a way where the fund keeps 20% of the profit and the balance 80% goes to investors. Say, the hurdle rate is 8%, and the fund generates 15%.

The extra 7% over the hurdle rate is split, with investors receiving 5.6% and the fund keeping 1.4%. One of the funds, backed by a blue-chip institution, has been clever enough to raise money before Lehman, sit on the cash for a year and invest it after the meltdown. But not all have been lucky; and a few missed the bull run. The four-year old party is slowly beginning to get a little crowded. Corporates, professionals, builders and brokerage firms are floating funds. And none of them has a problem in raising money.

What’s helping is a near stagnant mutual fund industry. Very little new money is flowing into mutual funds, which can no longer use investors’ money to pay brokers and banks who have so far helped them mop up funds. But real estate funds, away from the regulator’s glare, have no such curbs. They are paying as high as 3-4% commission to whoever is interested to raise money for them.

Corporate Strategist Homi Khusrokhan: 'Success Is Something You Feel Deep Inside'

Published in India Knowledge@Wharton


Homi Khusrokhan has spent more than 40 years in the corporate sectorwith companies like Tata Tea, Tata Chemicals and the Glaxo group in India. Last year, he was appointed special advisor to the board of Satyam. In an interview with India Knowledge@Wharton during the 2010 Wharton India Economic Forum, Khusrokhan discusses the aftermath of the Satyam scandal, the secret to making corporate acquisitions successful and some leadership challenges he has faced during his career. 

India Knowledge@Wharton: In 2009, you were appointed as special advisor to the board of Satyam soon after a major scandal broke over there. I am sure that our audience all over the world will be very curious about your impression of what really went wrong and what you, in your role, were able to understand about how India can avoid such situations again.

Khusrokhan: Well, when I took the assignment everyone said I must be crazy to take on something like that. But I found within a few days that it was a very fine company. It was just the actions of the promoters which brought it to its sorry state. But there were 40,000 people who worked very sincerely for this company, did a phenomenal amount of good. I really felt glad a few days later because I found there is so much you can do in a positive way for revival of this company. It's just very unfortunate that a promoter could do something like what [B. Ramalinga] Raju did.

How do you prevent such things in the future? Very difficult. I think you can always legislate. You can always sort of try and put tighter rules into the system. But eventually it comes down to the philosophy of the promoter. This was a blatant fraud and it was clear there was an intent to deceive and it was done over eight years very systematically, very methodically. So I don't think there can be ultimate safeguards against this sort of thing happening again. But I suppose there will be tighter regulations in the future and certainly people will have to be a lot more vigilant about these sorts of things happening.

India Knowledge@Wharton: Considering the fact that you have seen governance in a lot of different companies, were you surprised that the fraud went undetected for so long? And could there have been any red flags that people could have paid attention to in order to bring this to light sooner?

Khusrokhan: Yes. Seen in retrospect it is always easy to say, "Look, surely someone should have noticed this." But it was a very, very well thought out, meticulously planned, fraud. Most of the documents put before auditors were forgeries. One could say, "Look, the auditors are responsible for really checking on things and, therefore, one of the key areas of blame lies there." But then again, you don't know exactly how they were lured into this feeling that everything was hunky-dory. It was a very difficult situation.

India Knowledge@Wharton: The Indian government and the people on the board have received tremendous compliments for the way in which the whole Satyam situation was handled and the way in which jobs were not lost, clients were not driven away, and a new buyer was found. What sort of lessons do you think can be learned from that experience?

Khusrokhan: Well, we structured our entire exercise into three buckets. One was the customer, which is very important because we had to make sure customers didn't walk away. We had to look at the people, because a lot of people were very anxious, very uncertain about their future and, of course, the cash. It was a very, very illiquid company in a pretty dire situation. I think when we went in, I wouldn't be surprised if they had just about two weeks of cash left in the organization, so getting some cash inflows into the company – emergency loans – was extremely important.

One of the things which we realized fairly early on was that we needed to work very fast. If this were allowed to fester and drag on for a longer period of time, it could have been disastrous. So it was a tough choice. Some people said, "Look, are you guys going to do a fire sale?" We said, "No. We are going to make sure we get the best price for this company." But we had to move very, very rapidly.

India Knowledge@Wharton: I'm sure there must have been a fair amount of demoralization among employees as well as a high degree of skepticism among customers. How did you address those issues?

Khusrokhan: Well, the people felt very let down. A lot of them were completely shell shocked. They didn't know how this sort of thing could have happened. I mean, people who were not any where near the top of the organization were completely dismayed, demoralized. They thought they had built a great company and they suddenly found everything vanishing in front of their eyes.

As [far as] customers were concerned, we had two types of customers. The guys who said, "Look, we will not deal with a company which has indulged in something like this." And they walked away within the first week. That was a knee-jerk reaction and we just couldn't do anything about those. But those who hesitated a little, those were the guys we started working on and saying, "Look, this is not all bad. It is a great company. They have done a phenomenal amount of work – good work on the software side. If you stick with them, just weather this little period, everything will be good again." A lot of them fortunately stayed back.

India Knowledge@Wharton: Great. Well, let's take a step backwards in your career when you were at the head of two major companies in the Tata Group. In 2001, you took over at Tata Tea and, of course, the Tetley acquisition is very well known. Could you help us understand a little bit of the strategic thinking that went into your growth plans for Tata Tea and how you went about planning that growth?

Khusrokhan: Yes. Actually the acquisition decision had been made before I joined Tata Tea. One of my first tasks when I went in was to try to integrate the two companies. But the thinking was very clear and very sound. Tata Tea was an old world plantation company. Of course it had powerful brands in the Indian environment, but it was not known outside the shores of India. The only way to really grow the business geographically across the world was to acquire a major tea company and a major tea brand. It really changed the type of company Tata Tea was.

India Knowledge@Wharton: In what way?

Khusrokhan: Teas can be sourced from wherever you want. There is no sense force-feeding your own teas into brands. You want to buy the best teas available at the best prices. The temptation is when you have your own production of tea. You tend to use that in preference to the best teas available for the blends you need. So one of the tasks I had to do was difficult, to get people to focus on the value of [the] teas they were producing and not just the quantity and yields of teas. The temptation of a plantation is to say, "Look, I've produced X% more than last year." But if the quality isn't what they should have produced, it is really worthless tea. So I had to introduce a system of internal transfer pricing and every batch of tea produced was actually valued at the price it could get in an auction.So that's how we sort of changed the value concept of plantations. And then people began to realize that it wasn't just a question of the quantity produced but the quality produced.

India Knowledge@Wharton: You very modestly said that the decision of the acquisition was made earlier and yours was the task of the integration. Very often that is the toughest part after an acquisition. How did you go about doing it and what were some of the lessons learned?

Khusrokhan: I have done about three or four [integrations] before that. And I had to do two more, so I have done about six or seven now. I knew the basic model but while there are certain commonalities in all integrations there will always be some new thoughts which come out of an integration. But the process is pretty well trodden.

India Knowledge@Wharton: Could you walk us through some of the basic models? And what was unique in the tea situation?

Khusrokhan: Well, in most integration models, two or three things which I insist on [are] -- first of all, what is your integration philosophy? What are you going to do? Are you going to just put two companies together? Or are you going to try and build a new company? Are you going to try and chose the best of both when you make your choices between people and processes and systems? So we decided, and I'm comfortable with this philosophy, that we use [the] best of both. We said we will choose the best of the lot and put together a new company. I think that worked very well.

We also found that although people talk a lot about cultural problems, it is not such a huge issue. I think the mistake people try to make is to change cultures. You've got to understand cultures and respect them. You don't necessarily have to change them. You need to understand how things are done in a particular culture and adjust your way to handling that cultural difference. I think that is a far better approach than trying to say, "Hey, these guys are now ours, we bought them. They have got to do what we do."

At the end of the day I think most integrations fail because people don't manage the uncertainty which goes with an integration. You've got to really think about the people – the uncertainty they are going through. Allay their fears. If you put a little bit of caring and employee-involvement into integrations, they work much better. So that's just a couple of things.

India Knowledge@Wharton: That's very sound advice. You went through, as you said, a similar exercise (acquisitions) when you were at Tata Chemicals in the soda ash industry. Could you tell us about some of the unique challenges those posed for you?

Khusrokhan: The first was a British company, [chemicals manufacturer] Brunner Mond, which was very similar to the Tata culture. We had a 100-day period for doing all the administrative stuff. We also drew up a new strategic plan for the group going forward. This was a company which was owned earlier by private equity [investors]. So the moment they felt they were back in the fold of a chemical company they felt so much better. A chemical parent was what they were looking for and I think that we gave them that. Plus, they had been strapped for cash. We had things like R&D. We were doing work in innovation, new technologies, nano chemistry – the sort of stuff fascinated the people who were working in Brunner Mond and they really enjoyed coming into the fold of a large chemical company. So that integration worked really well.

And a few years later, well, 18 months later, we bought General Chemicals, which was a really big American company. And this again turned out to be a very simple integration. When I said to them, "Look, we will do a typical 100-day process," [they said] "Why 100 days? Let's do it in 50." That sort of thing. All gung ho and ready to go ... and much more open to change than the British culture was. They expected jobs to be lost. They expected people to be changed around. They expected changes in hierarchies and responsibilities. [They were] much more ready to accept that. So [we gained] some valuable learnings in those two as well.

India Knowledge@Wharton: Academic research shows that a large number of mergers actually end up destroying shareholder value rather than building it. What did you learn through your experience about how to prevent that happening?

Khusrokhan: You have got to draw up an action plan for how you are going to build value. At the end of the day the meat of the matter is in the value you create out of integration. Unless you have a plan going forward -- what you are going to do, and how you are going to build that value -- it just doesn't make sense. A lot of integrations tend to focus their attention on cutting costs and thinking that just by synergizing and reducing numbers we can produce results. But at the end of the day it is the revenue synergies and the expansions, the growths, the new product opportunities, which come out of integrations, which are far more important. So I'd sort of focus on the value-creation rather than just cutting costs.

India Knowledge@Wharton: Right. If I could take you still one step further back in your career to the almost three decades that you spent in the pharmaceutical business in India with Glaxo and Burroughs Wellcome. What were some of the challenges you faced as a multinational trying to operate in India's pharmaceutical industry especially at the time when regulation was pretty tough?

Khusrokhan: Glaxo was a very unique multinational. I used to always say when we were running that company that it was the multinational of the brown face because we really thought as Indians. We were manned by Indians. Our MD (managing director) was an Indian from, I think, 1975 or 1976; we didn't have an expat. Glaxo had some very strong beliefs and hats off to the chairman at the time, Sir Paul Girolami, who was a far-sighted, legendary strategist. Sir Paul said, "Look, for a country like India"-- and he said this sometime in the 1980s -- "I don't expect a bottom line out of this country for the next 25 years." You won't find many chairmen saying something like that. But he said, "As long as you do well in your environment and you are a respected company in the environment in which you operate I am happy." That philosophy continued for many years thereafter. We did, of course, have a lot more profit pressures as the years passed, but that [was the] basic sort of approach -- that India is going to take time, there is no great urgency.

India Knowledge@Wharton: Over the course of your career you have faced lots of different challenges. Which would you regard as your single greatest leadership challenge? How did you overcome it? And what did you learn from it?

Khusrokhan: It is difficult to say which was the greatest challenge? But I think there was a period of time when I had to learn to manage people. I was a functional guy. I was a finance guy. And I was suddenly put in charge of marketing and had a team of 1,400 reps to look after. These guys were getting unionized and I think my biggest challenge was to encourage them to move away from external unions and bring them back into the internal fold. I still look on that as one of my greatest learning experiences.

India Knowledge@Wharton: How did you go about doing it?

Khusrokhan: I intuitively didn't attack the level of the [representative]. I attacked the level of the manager they reported to and I said if I make changes there, then I think I'll succeed. If I had gone straight to the rep level I would have probably failed. But I got a lot of champions on my side by going to the level of middle management, convincing them that they had to treat their reps differently, and then worked on their bosses to make sure they were treated differently. And then everything fell into place. But it took about two-and-a-half years of hard work.

India Knowledge@Wharton: One final question. How do you define success?

Khusrokhan: Something that makes you happy. It has to be something that you feel within you. I don't think [of it as] a pat on the back. Of course it helps, but you know it has got to be something you feel deep inside -- that "yes, I have succeeded."

Punj Lloyd's Atul Punj: Why Fixing Rural Infrastructure Is India's Top Priority

Published in India Knowledge@Wharton


India is the "rowdiest" democracy in the world, says Atul Punj, chairman of engineering and construction services firm Punj Lloyd. According to Punj, investing in rural infrastructure needs to be the country's top priority, because that's where most of India's people live. Doing so will facilitate everything from getting children to schools and taking farmers' perishable produce to market. India can craft a model within its "own madness," Punj says in an interview with India Knowledge@Wharton during the 2010 Wharton India Economic Forum.


India Knowledge@Wharton: Infrastructure is often cited as a problem in India and many of the high profile infrastructure issues like airports and roads in urban areas are often talked about. What would you say is one of the most important infrastructure stories that is not being talked about enough?


Atul Punj: Well, one of the most important stories has been the development of rural infrastructure in India. In India, unlike China, we addressed it from the rural level first and have now moved to the urban level and in between urban centers. The development at the rural level is all about connectivity. If you don't have a road -- sorry, a rural road -- you can't get to a school. You can't get to a hospital. You can't get your produce to market. So the government for the past 10 years has been dealing with a lot of those issues at the bottom of the pyramid. We are now seeing traction happening at the top of it.

India Knowledge@Wharton: What would you say is the greatest impact of that lack of infrastructure in rural India? Which sectors suffer the most?

Punj: Well, agriculture. Seventy percent of India's population is still directly involved with agriculture. When you have 40% of perishables being lost because they cannot be taken to the market or the lack of a cold chain because of the lack of connectivity, that sector has really been hammered consistently. The recognition that we need to fix that has now gained a lot of currency in India, so we are going to start seeing some significant traction over there.

India Knowledge@Wharton: What do you think will change?

Punj: What will change is the ability for children to go to school [faster] rather than in some cases walking 10 km (6.2 miles) a day. Or getting [sooner] to a hospital for medical attention. You will start seeing a lot of economic activity taking place at the rural level rather than pure migration to the urban centers, which has its own problems. We are going to start seeing a significantly different India in four years.

India Knowledge@Wharton: What do you think needs to happen for these improvements to take place? Are significant policy changes needed?

Punj: Policies are all in place. It is the implementation in which we are lacking. It is the ability or the governance issue that needs attention. It is the systems that allow these programs to get rolled out that need attention. There is a lot of attention now being given because the electorate has become very smart. They are reelecting representatives who have delivered on their promises rather than voting purely on caste or religion lines as it used to be in the past.

You are seeing a significant shift in the way the rural resident is addressing his political mandate. And that is resulting in a lot of emphasis on delivery. And I think you are going to see a significant change now.

India Knowledge@Wharton: Punj Lloyd has operations in 16 countries, including Singapore, Thailand and China. What lessons can be learned from some of these countries in infrastructure development? You said that India has developed in a way that was opposite to how China had. What can India learn from these countries?

Punj: Not very much, because the Indian model is the Indian model. India has its own genius. It has its own madness. It is the rowdiest democracy in the world. It is the largest democracy in the world. It is many countries within a country. It is many societies within a society, many economic sections within that society. The fact that India is a democracy is what sets it apart from China. China is a command-and-control economy where the president or the prime minister or the ruling elite issues a command. And it will get done. In India the debate starts after an instruction is given. It is just the nature of the Indian.

Also, what happens is that very often we miss successive generations of technology. So when we finally adopt it and decide to reform a particular sector, we go for the best in class. A case in point: our telecom density was extremely low. They opened it up for private sector participation and today our teledensity is one of the highest in the world. The growth -- they are adding almost 100 million subscribers a year -- is more [subscribers] than most countries have. Until 1982 we had two television stations beaming black and white television, basically agrarian-based programs. We had the Asian Games in 1982. The whole country got blanketed with color television.

Similarly with highways. One of the biggest risks in financing a highway project is traffic. The fact that India is willing to catch up is not an issue. So the financing of some of these projects has now become easier than a lot of other countries have found. So when you go to somebody and you say that you want to finance a $1 billion highway project, you already have the data because it's not a new alignment. It is an existing two-lane being converted to an eight-lane highway. You already know how much traffic of what category is traveling on that part. So India is unique. I don't think we can really learn a lesson from any other country because it is not like any other country.

India Knowledge@Wharton: Reaching back into its own past, what can India learn rather quickly to catch up? What mistakes does it need to avoid?

Punj: What we need really do is make the bureaucracy at the lower levels much more efficient. It is a systemic fix that we need. There are too many layers, too many interested parties. In Delhi itself, for example, you have three sets of government. You have the lieutenant governor who controls the police and the Delhi Development Authority. You have the mayor who controls the Municipal Corporation of Delhi and you have a chief minister who controls the rest. So who is really in charge? And that's true for almost every city in India. So a lot of that needs to be fixed.

India Knowledge@Wharton: That filters down into rural areas as well?

Punj: It is now beginning to because the focus of the government is on inclusive growth. The focus is not on the few people that make the Forbes billionaires list every year and the few new ones that come on. The focus is on how you make sure that the economic activity really percolates down to the lowest possible level. Every speech by the prime minister talks about this. He has made corporate India very responsible to avoid conspicuous consumption, and see what they can do in terms of CSR [corporate social responsibility].

India Knowledge@Wharton: If you had to prioritize infrastructure development in rural areas, what is the most critical?

Punj: I would say water, because 70% of hospital beds in India are filled with people suffering from water-borne diseases alone. And the Indian support system for an individual is his family and the village. So when you have somebody transported from a village to a class B town or a class A town, he will typically be accompanied by at least five to six people. So you have now seven to eight people being taken out of economic activity because of that one individual. So it is a positive and it is a negative. But that is the most significant fix we need.

India Knowledge@Wharton: What would be at the top of the agenda for urban areas?

Punj: Land is the big issue. I had a friend visiting from overseas sitting in the front seat of the car with a video camera. I asked him what he was doing. He said if he ever tried to describe the traffic to anybody back home they would never understand it. "So I'm just going to play it back for them." We need to have the kind of focus that New Delhi is getting in every city. That is the biggest challenge.

India Knowledge@Wharton: Beyond improving roads or increasing their sizes, are there significant plans for development of public transportation?

Punj: Yes. New Delhi, for example, has been [expanding] its metro system. It has grown at record speed. By 2018 we will have 450 kilometers of track compared to London's 408. London has taken over 100 years to build [its tracks]. We will do it in 12. Based on that, Hyderabad, Chennai, Mumbai, Kolkata and a few other cities are all rolling out their mass transport systems.

India Knowledge@Wharton: What area is your company focusing on the most in terms of development?

Punj: We focus across the board. We focus on urban infrastructure. We focus on oil and gas. We focus on petrochemicals. We do a lot of offshore work in terms of pipelines, platforms, fabrication and erection. We do a lot of work in the renewable [energy] space. We have just commissioned the world's largest wheat-to-ethanol plant in the U.K. We have a large solar initiative that is panning out now. And, of course, in the nuclear space, we are playing a significant role.

India Knowledge@Wharton: An environment like India that is unique and has lots of bureaucratic hang-ups sometimes gives rise to a lot of innovation. Have you seen examples that have really struck you as innovative in developing certain kinds of infrastructure?

Punj: The whole country is [innovative]. Economists [have outlined] what India must have in terms of power, roads and airports to achieve 6% [GDP] growth. India has got none of that. We are now talking about it. We have been growing at over 8% without any of that. [India's] entrepreneurs are so innovative that they have found their solutions. You had somebody talking about being a vendor for BMW for their gearboxes. They are actually supplying out of India on a just-in-time environment. But they cannot predict when the next ship is going to come and how soon their goods are going to actually go out. In a completely uncertain environment, they are dealing with best-in-class European or American or Japanese automotive manufacturing requirements. But they found their solution. And this will hold true for any number of industries in India. So the innovativeness of the Indian is what sets him apart.

India Knowledge@Wharton: We just published a story on a really interesting project called Lifeline Express. What was interesting about that project was medical infrastructure piggybacking on railroad infrastructure. Are there other examples like that -- where you think one form of infrastructure can be used to help expand another form?

Punj: That happens in India. We are investors in what is the largest hospital project in the world. It is 1,250 beds started up in one phase. And we now partnered with Duke University as their research partners in India. We have what we call medical outreach programs. You have these fully-fitted buses that go into the villages and just spend weeks on end doing the initial screening of potential patients. You have women with gynecological problems or men with cardiac problems or diabetes, etc. Screening happens in the most rural of rural areas. So there is a lot of that that happens where you have the best-in-class in the city actually reaching out to the extreme have-nots. There's no charge. It's free. And doctors volunteer to go down from the hospitals.

India Knowledge@Wharton: Looking ahead five or 10 years, where do you envision India in infrastructure, given the current situation?

Punj: India will look a very different place physically over the next five years. We will see roads that will be up to international standards. We will see a lot of power generation [capacity] coming online. We will see a lot of transmission and distribution [capacity] coming online. Airports are now being commissioned. There is a world-class airport that has come up in 36 months, the second largest in the world -- 78 gates [compared] to Beijing's 18. You are seeing Mumbai under construction right now. You are seeing Chennai. You are seeing Kolkata. All have been upgraded. And you have 26 new airports that have been built. So India will look very, very different.

India Knowledge@Wharton: And rural areas as well?

Punj: Rural areas as well. I don't think rural India will lag because -- as I was explaining earlier -- the politician knows he has to deliver to his constituents. His constituent is not the city. His constituent is at the village level. I was in Canada recently with one of our ministers and we were all laughing that his counterpart on the other side had a constituency of 100,000 people. The Indian minister's constituency was 1.8 million with over 200,000 villages. So that's the electorate he has to address. They are the people he needs to deliver to. You are going to start seeing a huge amount of pressure. There is already a huge amount of development happening at that level.

Property Oversupply can Lead to another Real Estate Bubble

With India’s real estate market brimming with new launches, investors need to exercise caution while choosing projects. Leading private equity investor Gaurav Dalmia , founder chairman of realty-focussed Landmark Holdings that is investing $225 million in specific projects, feels speculative buying can act as a downtrend. In an interview Dalmia tells why he feels some pockets of real estate market may tumble in the coming months.


Developers continue with new projects even as prices remain high. Do you see demand taking a dip?
Demand is not low though speculative sales made earlier reflect a big downtrend. I think demand continues to be strong, but the situation of oversupply has restarted. As to where this will lead within the next year, I can only say ‘Bubble 2.0’. The market is doing well, but it will not stay healthy because of oversupply.

While the government is planning a housing start-up index (HSUI), are there any indicators for oversupply?
Many good projects are not getting mortgages because speculative buyers are not borrowing. With this disconnect, there is oversupply. Looking at certain markets, I’m not surprised there has been a correction, not in terms of price… but sales velocity has slowed down. Sales velocity is not low, but is less than earlier. My hunch is that over 60 per cent sales are speculative.

Does oversupply translate into price corrections?
There was a 25-30 per cent correction (in prices from two years ago). Funds are investing, but more selectively. Investors are also paying attention to existing investments. Prices in Delhi-NCR are too high for the average buyer. There is a mismatch between purchasing power (which is more real) and asset prices. The millions of buyers with their purchase price will affect asset prices in the long term.

What are the key parameters you consider when making an investment?
We look at the demand-supply situation. Demand is easy to forecast. Oversupply is what we worry about. In smaller cities, one or two sectors drive the market. If those go down, demand can suffer even though long-term trends may be very healthy. A developer’s project may have good location, good valuation… but not implementation. In the end it’s an implementation game, not an investment game…. (however) compared to one year ago we are not finding better deals now. We cannot measure (the amount of money we have put in) as we continually rotate our investments. We have invested in 22 projects where (returns) range from 15-35 per cent.

What about your investors (those who have invested in your fund), what kind of expectation do they have?
They still have expectations of at least 20 per cent returns that one can make in emerging economies. While no market that is comparable to India, Brazil, China, and even Vietnam have similar trends. In India, suburbs may struggle until infrastructure is created.

Do you think a real estate Regulator Bill will benefit the industry?
The licencing process in India is not transparent… it is dirty and cumbersome. You can’t have a (national) policy that will correct it. The problem is state-level legislation. A real estate regulator will ensure what (a developer) has promised in a contract is delivered to a consumer, nothing more… If you are running a gambling den, you won’t want to have cops around.

As an institutional investor, do you have a say in the timely execution of projects?
We certainly do. The developer is also trying to (complete a project) quickly because his money is locked in. It’s just a question of if he is lifting his eye off the ball to play something else. I don’t think developers deliberately delay projects.

Just a year ago, developers were struggling to find buyers. What do you think their position is now?
A lot of the inventory is cleared. Debt position of many developers has improved because of sales and because they raised equity. I don’t see the kind of pressure that was there one year ago. The better developers are doing alright, the bad developers we won’t work with no matter what.

ADB $150 Million Financing Facility to Help India Improve Urban Infrastructure

MANILA, PHILIPPINES - The Asian Development Bank (ADB) is extending a $150 million multitranche financing facility to help India’s National Capital Region (NCR) accelerate plans to build urban infrastructure.

ADB’s Board of Directors approved the India National Capital Region Urban Infrastructure Financing Facility, which will provide funds in two or more tranches. It will extend long-term finance for improved urban services, while helping to encourage private investor interest, and support for a regional rather than city-centric approach to development.

India’s economy has been growing at one of the fastest rates in the world in recent years, fuelled by its booming cities, but municipal governments have struggled to keep pace with the demand for services because of financing and capacity constraints. In the NCR, which incorporates Delhi and subregions of three states, the population is expected to almost double to 64 million by 2021 from 37 million now, and the NCR Planning Board has notified the Regional Plan 2021 that it has identified investment needs in transport, power, water and solid waste totaling about $43 billion.

The financing facility will allow the NCR to accelerate its planned investments by providing long-tenure funds. It will identify bankable projects, extend capacity-building assistance for sub-borrowers of the funds to design and execute high-quality infrastructure, and help attract private investors and public-private-partnerships into the sector. The impacts will be improved health and economic well-being for millions of urban residents.

Infrastructure planning in India’s cities is often narrowly focused but the NCR Planning Board’s Regional Plan seeks to take a broader approach, providing more comprehensive and environmentally-friendly development that can reduce negative aspects of urbanization such as pollution, slums and traffic jams.

“A regional approach is more proactive, enabling systematic and inclusive urbanization and sustainable growth and this is the basis of the NCR Planning Board’s business plan and one of the primary motivations for the new financing facility,” said Sekhar Bonu, Principal Urban Development Specialist in ADB’s South Asia Department, noting that a strengthening and transformation of the Planning Board will help it to become a model for other state-level urban sector institutions to emulate.

The first tranche loan of $78 million will have a 25-year term, including a 5-year grace period, and an annual interest rate determined in accordance with ADB’s LIBOR-based lending facility. An additional $50 million will be provided by the NCR Planning Board for targeted investments. The Planning Board is the executing agency for the investment program, which is expected to be completed by June 2017.

Temasek, HDFC Property Ventures Eye Stake In IPO-Bound Embassy

August 09 2010, 17:12:41 IST | BOBY KURIAN & MADHAV A. CHANCHANI; VCCircle

Singapore sovereign fund may co-invest over $100 mn with HDFC, which has exposures in Embassy SPVs.

Southern real estate major Embassy Property Developments Ltd is holding talks with Singapore's Temasek and HDFC Property Ventures for private equity placement topping $100 million even as the Bangalore headquartered developer is working on an initial public offer (IPO) in 2011.

Banking sources familiar with the development said, Temasek could be co-investing with HDFC Property Ventures, which has made three large project level investments with Embassy in the past. Temasek is an investor in the $800-million HDFC fund and has the option of investing along with it.

Jitendra Virwani-led Embassy filed for an ambitious Rs 2,400 crore (or $520 million) IPO with the Securities Exchange Board of India (SEBI) last month, and appointed investment banks UBS, Citigroup, Nomura and Edelweiss for the public issue that most probably will hit the market next year.

Embassy Chief Financial Officer Gopinath AT declined to comment, when contacted. Phone calls and text messages to its Chairman Virwani over the weekend did not elicit any response. A Temasek spokesperson declined to comment on speculation. An HDFC spokesperson said that officials were not available for comments.

The firm has developed over 24 million sqft of real estate (including the share of joint development partners and others) and manage economic interests from a substantial part of what it owns (rather than opting for outright sale). The portfolio is skewed towards large business parks (like the 6.12 million sqft Embassy Golf Links) and SEZs even though residential, retail and hospitality verticals are now beginning to fill up the revenue streams.

It is not certain whether ongoing talks with Temasek and HDFC arm for entity level investment would be classified as pre-IPO placements given the fact that the company had disclosed plans for raising Rs 1,175 crore through this route in its recent regulatory filings. The valuation of Embassy, assuming the upper end of pre-IPO fundraise and shares to be issued, could be $4.25 billion or Rs 19,889 crore on a pre-money basis.

One industry source said HDFC Property Ventures was also infusing investments into Embassy's proposed luxury villa project around Devanahalli near the Bangalore International Airport, which was part of  re-arranging its investments at Embassy before the IPO. HDFC was shifting some of its SPV investments to the new ventures, like the Devanahalli lifestyle development, which will also attract a part of the public issue proceeds.

In 2009, HDFC Fund and Temasek had discussed the possibility of Rs 600 crore investment into rival real estate developer Prestige Estates Ltd, which has been readied for an IPO as early as September this year.

Embassy reported revenues of Rs 383 crore with a net loss of Rs 3.5 crore for the 11 month period ending February 2010. The lack of sizeable presence in residential segment and dependence on lease rentals rather than outright sale of developed space has limited Embassy's topline potential despite its size. Out of the developed commercial area of 18.73 million sq. ft., 7.36 million sq. ft is Embassy's economic interest. Out of 5.6 million sq. ft. residential area developed, around 1.6 million sq. ft. is held as economic interest.

Of the Rs 2,400 crore issue, Embassy plans to use around Rs 803 crore to invest in ongoing projects, Rs 685 crore in various subsidiaries and around Rs 123 crore pay loans (including loans of subsidiaries).

HDFC raised one of the largest real estate funds in India at $800 million called HIREF International LLC. Its investments include a realty project of Lodha Developers, another realty firm which has filed for an IPO. Temasek made its first direct investment in Indian real estate earlier this year by picking up a 4% stake in Sobha Developers. Temasek, whose realty investments are mainly driven out of Singapore, has investments in one of the largest Asian real estate firm CapitaLand.

A host of developers have filed with SEBI for IPOs but have held back due to the weak sentiment. Developers like Emaar MGF, BPTP, Lodha Developers, Sahara Prime, Prestige Estates, are some of the other players who have filed for public offerings. Recent reports have said that Emaar MGF has cut the size of its issue by half.

Private equity deals have revived this year but are still few as compared to 2007-08 as investors now try to drive hard bargains. From January till the end of July 2010, there were 18 deals in the Indian realty space with a disclosed value of $441 million as compared to 10 deals with a value of $188 million in the same period last year, according to VCCEdge.

ake-offc i v p Ȥ rojects in the state,’ Rawat noted.

In the core sector, investment in mining was a mere 1.7 percent, while irrigation witnessed 0.8 percent deceleration last fiscal compared to previous fiscal (2008-09). Similarly, share of investment in real estate declined 6.5 percent during the last two years compared to other sectors though growth year-on-year basis was 0.3 percent in last fiscal.
‘Growth of construction industry is crucial to economy, social and human development which should be sustained by adoption of energy efficient housing sector,’ Rawat pointed out.

Out of total investments of Rs.105 trillion the country had in last fiscal from public and private sectors, Karnataka’s share was 7.4 trillion or 7.1 percent. Two-thirds of total investments in the state were by private sector while government sources accounted for remaining one third, the study said. ‘We have laid out multi-pronged strategy for the state’s economic development so that it becomes a lead investment destination. Power sector projects needs to be implemented without delay as it remains a key sector for ensuring economic development,’ Assocham’s southern regional council chairman Ravi Sannareddy said.

‘Karnataka has established a lead in IT related services along with modernisation of ports especially, airports. The state needs to pursue its metro projects with vigour so that steel and cement and other allied sectors grow simultaneously,’ Rawat added.

Only 35 percent of all Karnataka Real Estate Projects Under Implementation- Assocham

Only 35 percent of the Rs.7.33 trillion (Rs.7.33 lakh crore) investment projects in the public and private sectors have been commissioned in Karnataka or are at various stages of implementation, the Associated Chambers of Commerce and Industry of India (Assocham) said Sunday. ‘Though pro-active Karnataka attracted a whopping Rs.7.33 trillion investments till March this year, only 35 percent of them are under implementation, while 65 percent of projects are yet to take off,’ Assocham secretary general D.S. Rawat told reporters here.

An assessment by the chambers on ‘Growth Performance in Karnataka’, found that the state attracted 1,346 investment projects over the past decade, with the manufacturing sector accounting for the lion’s share (42.5 percent) of total investments, followed by power (22.3 percent), services (16.2 percent) and real estate (13.2 percent). ‘Global recessionary trends and slow down in the Indian economy last fiscal (2009-10), however, resulted in the poor take-off of investment projects in the state,’ Rawat noted.

In the core sector, investment in mining was a mere 1.7 percent, while irrigation witnessed 0.8 percent deceleration last fiscal compared to previous fiscal (2008-09). Similarly, share of investment in real estate declined 6.5 percent during the last two years compared to other sectors though growth year-on-year basis was 0.3 percent in last fiscal.
‘Growth of construction industry is crucial to economy, social and human development which should be sustained by adoption of energy efficient housing sector,’ Rawat pointed out.

Out of total investments of Rs.105 trillion the country had in last fiscal from public and private sectors, Karnataka’s share was 7.4 trillion or 7.1 percent. Two-thirds of total investments in the state were by private sector while government sources accounted for remaining one third, the study said. ‘We have laid out multi-pronged strategy for the state’s economic development so that it becomes a lead investment destination. Power sector projects needs to be implemented without delay as it remains a key sector for ensuring economic development,’ Assocham’s southern regional council chairman Ravi Sannareddy said.

‘Karnataka has established a lead in IT related services along with modernisation of ports especially, airports. The state needs to pursue its metro projects with vigour so that steel and cement and other allied sectors grow simultaneously,’ Rawat added.

Opportunities for Small Investors in Real Estate Sector

In India, small real estate investors currently do not have as much scope as institutional investors. They can hold multiple properties, but banks will generally not fund beyond a second home loan. That does not mean they cannot invest beyond that from their personal accruals. They certainly have the option of investing in rent-generating assets, which can fetch very decent returns if they have been purchased wisely.

Despite the present limitations for small investors, a property investment can give the buyer protection against inflation. Like gold, real estate tends to retain its intrinsic value. However, unlike with gold, it is possible to earn a regular income on it. Depending upon various economic factors, a property owner can increase rent in times of high inflation. Also, real estate is always a good investment option because of the possibility of capital appreciation. Of course, an individual must decide on the basis of his own income, existing financial health and risk appetite how much he should allocate for real estate.

The limitations pertaining to buying and selling of real estate in India exist to prevent speculation. Considering what has happened before such regulations were enforced more strictly, they are required. We do not want a situation similar to that faced by the US in this country - thankfully, our banking system is a lot more conservative , and this has been one of the main reasons why India did not suffer as much as other countries did in the recent economic turmoil. Unfortunately, there is currently no way of predicting when they will become a reality. Small investors will only get real investment power when REITs (Real Estate Investment Trusts) and REMFs (Real Estate Mutual Funds) see the light of day in India.

These vehicles will present a liquid, dividendpaying means of participating in the real estate market. We are all still awaiting clarity on the introduction of REITS and REMFs in India.

Pursuing Global Real Estate Opportunities

In a recent interview, John D. Macomber, Lecturer and Gloria A. Dauten Real Estate Fellow at Harvard Business School (HBS), shared his thoughts on what it will take for organizations to achieve success in real estate investment and development, while managing resource scarcity as the economy begins to rebound. (Adapted from Harvard Business Review).

Q: Many real estate portfolios are under pressure from rising vacancies, crippling debt levels, and a slow economic recovery. What must owners and managers do to survive?

Although institutional demand for investment in commercial real estate appears to be waning, users of real estate are going broke or are under financial stress. Tenants are asking landlords for rights to sublease footage or to break their leases—even as the nature of the way they use space continues to evolve. A number of investors have walked away from properties, some with substantial publicity. On many corporate and bank balance sheets, asset valuations remain high, and will remain so until distressed assets work their way through the system and reach market equilibrium.

All of this means that investors, owners, and asset managers will have to be more strategic and perhaps more draconian about how they view and value their portfolios. They must ask themselves whether it makes sense to hold on to every asset as long as possible before writing a check or writing it off. For newer deals, they must find new ways to rationally evaluate a decision to put fresh equity into the asset. In every instance, they must make do with fewer resources in both cash and personnel. This places a premium on having the best people, the most current thinking, and the finest tools at hand.

Q: Where are the next sources of opportunity for real estate owner-developers?

For entrepreneurial companies pursuing scale and new ground-up projects, the biggest opportunity is in anticipating urbanization and the demographic and design changes it will bring. Chief among these is density. As the population of the planet moves to cities, resource efficiency will become more important. It’s hard to imagine that hundreds of millions of people can live in cities based on the sprawl and car culture of Atlanta, Mexico City, or New Delhi. In China today, there are 20 cities that have more than 5 million residents; nearly half of the country’s population live in urban centers. Even so, the megacities of Shanghai, Guangzhou, and Chongqing cannot absorb all of the migration.

Forward-thinking firms need to take into account not just the next short-term deal, but also urbanization trends, transportation needs, healthcare, resource scarcity, and policymaking related to the public-private financing of infrastructure development. These insights can be synthesized to help firms compete by building smarter, denser, and greener.

From a competitive point of view, metros that have more robust infrastructure elements—transportation, water, energy, and jobs—will thrive better than cities that don’t provide these essentials. This thinking leads to action steps both in the selection of cities and in the choices of development strategies within cities.

Q: You advocate for developers to carefully think through issues of resource scarcity. Why?

The key issue around scarcity relates to demand, not to supply. Take power. There are so many businesses working on the energy supply side—developing next-stage technologies for wind generation, solar, gasification, batteries, and so forth. These are expensive, and, let’s face it, exciting pursuits, with high potential for investors in technology.

But those of us who work in the built environment ought to focus on ways to reduce energy demand. In our classes, we use a McKinsey global cost curve that maps a cost-benefit construct for greenhouse gas reduction. This model also applies to other key resources like fresh water, by the way.

McKinsey’s analysis and our research show that we can save money and reduce demand for key resources through low-tech, trailing-edge practices—such as adding better insulation, lighting, air conditioning, and water-recapture systems in shopping malls; building more densely; and increasing floor-area ratios. This is both good business and good policy. It saves putting further pressure on resources, thereby allowing for more efficient economic growth. But the money-making opportunities that these approaches present are currently not well understood. Only now are the more progressive, leading-edge firms starting to deploy them.

John D. Macomber John D. Macomber is a Lecturer and the Gloria A. Dauten Real Estate Fellow at Harvard Business School. His professional background includes leadership of real estate, construction, services, and technology businesses. Macomber has been a lecturer at MIT in Civil Engineering and Real Estate for almost 20 years, and still teaches a course there in Real Estate Sustainability. He is the chair or co chair of several HBS Executive Education programs, including “Develop India,” the “Real Estate Management Program,” the “Real Estate Executive Seminar,” “Real Estate Development, Design, and Construction,” and the “South Asia Real Estate Seminar.”

Commercial Real Estate Faces the Problem of Supply Overhang

India’s realty sector is likely to face the problem of plenty with office rental space set to outstrip demand resulting in a further drop in rentals, according to a report released on Tuesday. “With the forecast growth of net completions expected to outpace that of net absorption, a significant supply overhang is expected to remain over the next one year,” Confederation of Indian Industry (CII) and global real estate services firm Jones Lang Lasalle Meghraj said in a joint report. “This will lead vacancy level across India, which was 17.2 percent in 2009 to rise to 20 percent by 2010 end,” it added.

It said the commercial lease and rental space in India would witness a low occupancy rate till 2011. The report, however, added that most Indian cities have witnessed an increase in the volume of lease transactions in the first quarter of 2010 with Delhi, including the national capital region, Mumbai and Hyderabad having recorded more than a million square feet of leases each. In 2009, occupiers showed a strong preference towards operational vacant stock rather than projects under construction, a departure from 2007-08, the report pointed out. On the future trend, report said the most micro markets were expected to reach their rental lows within the next 2 3 quarters, if not reached as yet. This indicates that the window of opportunity for occupiers, where balance of power favours them, continues to shrink with every passing quarter.

“With India’s economic recovery well under way, its commercial real estate market is beginning to stabilise. Apart from charting the today’s lucrative micro-markets in terms of commercial real estate, this report also affirms that the commercial property landscape will remain favourable for tenants in 2010, and that landlords will have greater influence towards the beginning of 2011,” said Abhishek Kiran Gupta, Head Research and REIS, Jones Lang LaSalle Meghraj. The report titled “The Seven Stars of India India’s best performing micro markets for occupiers” highlights the trend and forecast on realty rental market in seven cities of India Delhi, Mumbai, Pune, Chennai, Bangalore, Hyderabad and Kolkata.

29 pc Slump in Realty Focused PE Funds

Money raised by realty focused private equity funds tanked to a six year low of USD 7.3 billion across the globe in April-June period of this year as institutional investors remained hesitant about committing capital. According to a report by global research firm Preqin, “this was the lowest quarterly fundraising total since Q3 2004, when 30 funds raised an aggregate USD 6.1 billion,” The report noted that private equity real estate funds are still struggling to raise capital in the current economic environment.

In the April-June quarter, 20 real estate funds made aggregate commitments of USD 7.3 billion, down 29.12 per cent from USD 10.3 billion in the year-ago period. Besides, the aggregate set target of raising funds has also steadily fallen in recent quarters, as fund managers have started setting more modest targets. “The number of funds currently in market has fallen in Q2 2010; this is due to a number of fund managers abandoning their fundraising efforts because of difficulty in garnering investor commitments,” the report added. It is clear that the fundraising environment remains extremely competitive and that the recovery, which many predicted, is yet to occur.

“There has been a severe decline in the performance of real estate funds, and consequently the performance of many institutions’ real estate portfolios, since the onset of the economic downturn. This has led to a large number of investors re-evaluating their real estate strategy, with a number increasingly looking towards core investments,” Preqin said. During 2009, 93 funds committed USD 40.50 billion, while in 2008, 228 funds raised an aggregate USD 134.30 billion.

North America focused funds raised USD 5.4 billion, accounting 74 per cent of capital during the quarter under review, four Asian and rest of the global funds stood at USD 1.2 billion while five European funds garnered USD 70 million, it said. Nevertheless, there have been some encouraging signs for firms raising private equity real estate funds. Of all the funds that have closed during 2010, around 20 per cent have exceeded their fundraising targets. While in the corresponding period in 2009, the figure was six per cent.