Goldman inks $300m realty JV with Nitesh

MUMBAI: Wall Street bellwether Goldman Sachs is set to invest $300 million (Rs 1,850 crore) in a joint venture company floated by listed developer Nitesh Estates, which will own and operate commercial real estate assets in India, people directly aware of the matter said.

Goldman will hold 74%, leaving Bangalore-based Nitesh Estates with 26% in the JV entity with plans to acquire rent-yielding office parks, shopping malls and luxury hotels, sources added. The impending deal is a proprietary investment from the Goldman Sachs balance sheet which has assets estimated at over $900 billion.

It joins a growing list of marquee global investors like Blackstone, Brookfield Asset Management, Qatar Investment Authority and GIC of Singapore which have been buying into India's over 400-million-sqft commercial real estate market over the last few years.

India's services-led economy - the fastest growing in the world - has thrown up a stable market for income-generating commercial real estate, giving investors a chance to list these assets through real estate investment trusts (REITs). These trusts are listed entities holding income-generating real estate assets from which earnings are distributed to shareholders. The Indian market regulator came out with REIT guidelines last year to help real estate and infrastructure developers list their rent-yielding assets, and providing large and small stock market investors with an inflation-indexed product.

Goldman Sachs is partnering with the first-generation entrepreneurial company Nitesh Estates, founded by 37-year-old Nitesh Shetty, to create a platform of assets worth almost $1 billion in the next few years. The still unnamed JV, on which a battery of top lawyers are completing due diligence, is expected to employ leverage financing of up to three times the equity commitment to go on a shopping spree.

Shetty, who built India's first Ritz Carlton Hotel, has in the past worked with several big global investors including Och-Ziff, Apollo Management and Citigroup. When contacted, he declined to comment on speculation. Goldman Sachs, too, offered no comments on this story.

Last week's Union Budget provided some tax clarity on REITs even though certain structuring challenges still remain. Four Indian developers - Embassy Office Parks (Blackstone), K Raheja Corp, RMZ Offices (Qatar Investment Authority) and Prestige Group - are readying to list their assets, which could translate into at least a $20-billion REIT market in the next few years.

The Indian market would rival or surpass Mexico's REIT market, often cited as a successful new world experiment, launched three years ago and with a current market value exceeding $18 billion. New York, London and Singapore have hogged the limelight in developed market.

New York-listed Brookfield Asset Management, with real estate and infra assets worth over $200 billion globally, struck the single largest deal when it acquired the office parks of Unitech for $1 billion - $400 million in equity and $600 million in debt. Private equity giant Blackstone Group, too, struck office park acquisitions worth more than $1 billion in recent years in India.

Blackstone-backed Embassy Office Parks and Brookfield India, with 21 million sqft and 17 million sqft portfolios, are among the top five office landlords in the country.

DLF tops the list with around 30 million sqft.

While foreign investors have mostly invested in office buildings, that too specifically in 125-million-sqft IT SEZs until now, they are turning to the country's hotels and shopping malls which have remained undervalued or, in some cases, distressed assets for a while.

Blackstone, others gear up to list REITs as India finalises rules

NEW DELHI – Blackstone Group(BX.N: Quote, Profile, Research) and its partner, Embassy Group, are laying the groundwork to cash in on their property holdings by setting up India’s first real estate investment trust (REIT) and listing it on one of the country’s stock exchanges.

The move comes as Prime Minister Narendra Modi’s government works to finalise rules as early as next month that will govern the trusts. The finance ministry is expected then to clarify tax rules for REITs in the budget, people with direct knowledge of the matter said.

The world’s biggest property investor and Embassy have a joint portfolio of more than 20 million square feet of offices in India, which is likely to help value their REIT at $2 billion, said Jitendra Virwani, chairman of Bangalore-based Embassy.

Listing REITs gives companies like Blackstone, The Xander Group, an emerging markets investor backed by the Rothschild family, and private equity firm Red Fort Capital, which counts Abu Dhabi Investment Authority among its investors, an attractive option to exit some of their investments.

“We are actually gearing up because we feel the pace the government is moving at is faster than what we would want, so it is better to be prepared much earlier than later,” said Virwani, who was set to meet Blackstone on Thursday to draw up a plan for the listing.

A spokeswoman of the tax department did not answer requests for comment. Blackstone did not respond to a request for comment.

The long-awaited move by India will be implemented by the country’s market regulator after the ministry clarifies tax rules to transfer assets into a separate vehicle before listing the trust, which had triggered worries over double taxation.

Implementing REITs will also be one early sign from Modi of how he wants to bolster the economy, which is suffering its longest spell of under-5-percent growth since the late 1980s.

India issued draft regulations for REITs in 2008, but was forced to shelve the plans after the global financial crisis dried up investor interest and an economic downturn dimmed the outlook for real estate investments.

If REITs are approved, India will follow China, where regulators in April approved the first property trust. The absence of REITs in China and India made Singapore and Hong Kong the preferred markets for listing property assets in the region.

REITs, listed entities that invest mainly in leased office and retail assets and distribute most of their income to shareholders as dividends, will give developers a new avenue to raise funds by allowing them to sell finished commercial buildings to investors and list them as a trust.

MORE LIQUIDITY

Between 2008 and 2013, private equity funds invested more than 452 billion rupees ($7.6 billion) in Indian real estate, of which more than a third was spent on office and retail assets, according to data from Cushman & Wakefield, an international property consultant.

“If there is more liquidity in the market, if people believe they have clearer exit possibilities, obviously it is helpful to any investor,” said Siddharth Yog, managing partner at Xander.

“If REIT laws came into being and a potential REIT listing in India was possible, it could be one of many potential exit strategies that could be explored,” said Yog, adding that REITs, however, will not dictate the company’s investment plan.

In 2012, Blackstone paid $200 million for a 50 percent stake in three office assets managed and owned by Embassy and mainly located in Bangalore. Earlier this year Blackstone and Embassy hived off their portfolio of assets into a separate vehicle, taking their first step towards listing a trust in India.

The portfolio, leased to tenants like Microsoft (MSFT.O: Quote, Profile, Research), IBM (IBM.N: Quote, Profile, Research) and Goldman Sachs (GS.N: Quote, Profile, Research), generates an annual rental income of 8 billion rupees and Virwani expects this to rise to 10 billion rupees by the time it lists a REIT.

“To have a brand like Blackstone along with us will help us market the REIT and get a better valuation.”

Source: Reuters, By Aditi Shah (Additional reporting by Rajesh Kumar Singh; Editing by Sumeet Chatterjee and Matt Driskill)

Indian realty industry to almost double to $140B by FY17

BY  Pooja Sarkar, VCCircle

The industry, which had been growing at around 8 per cent annually during 2009-11, saws a 6.5 per cent deceleration in 2012-13.

The Indian real estate industry is expected to grow to approximately $140 billion by FY17, said a research report on real estate released by advisory firm Ernst $ Young and industry body FICCI. The report said, according to industry estimates, the size of the Indian real estate market was close to $78.5 billion in FY13.

Niranjan Hiranandani, chairman of FICCI’s real estate committee and managing director, Hiranandani Constructions Pvt. Ltd, said, “Mumbai urgently needs change of infrastructure with the support of government and also reforms in taxation, with 34 per cent of cost of an affordable house going out as taxes.”

The realty industry, which had been growing at around 8 per cent during 2009-11, saw a 6.5 per cent deceleration in 2012-13 primarily due to the sluggish domestic growth, rising input costs and negative global economic sentiments.

The sector’s major growth driver has been the pumping of capital through foreign direct investment (FDI) route. Between April 2011and July 2013, the sector attracted FDI of close to Rs 100,000 crore. The report, however, said the volume of FDI into the sector has been declining.

Even for private equity funding, the sector saw its peak in 2007 when $6.8 billion came in. In 2012, the industry attracted $1.7 billion from limited partners in realty projects across the country, as per the report.

For the first half of the current calendar year, the realty industry has seen investment of close to $1.4 billion and industry experts indicate that this year would be one of the better years compared to last four years.

With negligible sales and developers’ reluctance to bring down prices of properties, even banks’ credit exposure to the real estate and housing sector declined from 10 per cent as a percentage of gross bank credit in FY10 to 7.9 per cent in FY13. While bank construction finance continues to be the cheapest source of funding, another instrument which has caught attention of developers is raising money through non-convertible debentures (NCDs). Reflecting this trend, NCDs worth $4.2 billion were issued in 2012 compared with $3.8 billion in 2011.

The realty industry recently witnessed a few big-ticked buyout transactions in commercial office space by private equity funds. Over the last three years, it has attracted investment of $1.14 billion in commercial office space portfolio development.

(Edited by Joby Puthuparampil Johnson)

Coming soon: bonds that would pay you rental income from property

Reuters

Mumbai: Indian property firms, including DLF Ltd, are gearing up to sell the country's first bonds backed by rental income from their office buildings and shopping malls.

The bonds would open a new source of capital for a commercial property sector weighed down by $22 billion of bank debt and sluggish rentals, and come on the heels of new rules allowing developers to raise money through real estate investment trusts (REITs).

Property and infrastructure lender IDFC is at the most advanced stage, with plans to sell at least Rs. 300 crore in a debt security backed by lease rentals from an IT park in Noida, outside Delhi, and a special economic zone in Pune, said people involved in the discussions.

IDFC declined to comment.

DLF, India's biggest listed developer, is in talks to raise up to Rs. 1,000 crore in a bond backed by lease rentals from two malls by the end of this year, the people said. The developer has in the past talked about raising funds through such a vehicle. Developer K. Raheja Corp is also pursuing an asset-backed deal, but is proceeding slowly, Neel Raheja, group president, told Reuters. 

Credit Suisse and JP Morgan are among banks tapping property companies and investors to gauge their interest in the structure, the people said. Both banks declined to comment.

"Bankers have pitched deals for IDFC and DLF to us. We are assessing the risk of the product and waiting for the rating," said a senior fund manager who declined to be named because the talks were not public. He said IDFC was likely to issue the first such bond, within a month.

MORE LRD THAN CMBS

While the bond structure is loosely referred to in India as a commercial mortgage-backed security (CMBS), it differs from a CMBS in the United States or Europe, under which lenders securitise mortgages on commercial property.

Rather, DLF and IDFC's proposed bonds would be similar to so-called lease-rental discounting (LRD), sold in a bond. Rental income is used to pay the interest to the bond investor, while the principal is repaid at maturity, the people said. In an LRD, the principal is amortised over the life of the debt. 

Both DLF and IDFC are considering bonds with 5-year maturities and an option to extend the borrowing to 7 years. The debt would be issued by a special purpose vehicle that owns the underlying property and would carry a credit rating independent of the developer.

DLF's executive director of finance, Saurabh Chawla, confirmed the developer is looking at such a debt structure for its offices and shopping malls, but gave few details.

"We are exploring the possibility," he said. "There are many such programs that we have which we hope to complete over the next 6-9 months." 

DLF earns more than 20 billion rupees in rent every year, Chawla said. The company has also been selling non-core assets to reduce its debt.

YOUNG DEBT MARKETS

Indian property developers, typically family-run, usually rely on bank loans and selling equity to fund their operations.

India's corporate bond market has traditionally lacked the depth and liquidity to serve as a major funding source for all but the highest-rated companies. More exotic bond products, meanwhile, have failed to take off because of low investor appetite and regulatory restrictions that prevent many investors such as pension funds from buying riskier assets.

The search for new ways to raise funds comes after Indian developers gorged on cheap bank loans during a property boom in 2006-07, which was ended by the global financial crisis as well as high domestic inflation and interest rates.  

Demand for commercial property in India has also weakened in some cities as corporate tenants rein in costs by consolidating operations, according to a report this month by CBRE.

IDFC is considering an asset-backed security that yields 10.75 percent to 11 percent, said those close to the discussions, below the roughly 12-13 percent interest on a loan for a similar duration.

Property-backed bonds carry risk, as issuers can default if lease payments are disrupted. Defaults on mortgage-backed assets were a key contributor to the 2008 global financial crisis.

The Indian market for property-backed bonds is likely to develop slowly. "The tap may finally open, but not in strong force," said Sandeep Singh, director of structured finance at Fitch Ratings in Mumbai.

Raheja said his company is considering doing a deal in the next 3-6 months. "Before we do it we want to make sure it goes right and therefore we are not rushing into it," he said