Indian real estate on a roll

The Indian real estate has gained a lot of traction from both within and outside the country in the past couple of years. A huge pent up demand and access to funds were the key drivers for propelling the Indian real estate market into an overdrive.
The industry received the much-needed first shot of funding in 2005 wherein the foreign direct investment (FDI) route was opened up for Indian real estate. Since then the Indian real estate sector has transformed to reach $57 billion in 2007, and has a potential to reach $90 billion by 2012 according to the Eleventh Five Year Plan.
The accelerating growth momentum has paved the way for exciting opportunities for both domestic as well as international investors. The real estate industry has multiple stakeholders right from developers to investors (including private equity funds), financiers, buyers (including Real Estate Investment Trusts) and service providers such as property consultants, contractors and project management companies. A typical consolidation may be triggered by any of these stakeholders.
Consolidation by way of land acquisition by the developer and real estate investor has been going on since ages. But the first real wave of classical consolidation came from the service providers — more specifically the international property consultants when Meghraj entered into a joint venture with Trammell Crow and later Trammell Crow Meghraj merged with Jones Lang LaSalle. Similarly, Colliers Jardine merged with CB Richard Ellis.
Project-specific JVs emanated from the need for real estate developers to get access to technology and requisite funds to carry out large scale projects. This triggered off a series of JVs with both Indian as well as international players.
Some of the large JVs that have taken place include Akruti with DLF, ICICI Venture with Tishman Speyer, Vornado Realty Trust with the Chatterjee Group, etc. In some other cases overseas developers and investors opted for a JV with a local partner as an entry strategy. While the foreign partner provided technical and financial muscle, the local partner provided a better reach in the local market, knowledge and consequent handling of all domestic issues. Some such well known JVs include Emaar with MGF, Walton Street with Sriram properties, Nakheel with DLF.
The market is also witnessing a contrarian approach whereby corporate houses, in order to monetise their real estate assets, have opted to take the de-merger route. These companies have hived off their real estate assets into separate entities (either listed or otherwise) and propose to carry out their future real estate activities under this. Some of the classic examples are India bulls, the Piramal group and Mahindra Lifespaces (formerly known as Gesco Corporation Ltd). Interestingly, certain government departments like railways, port trust and postal department have also indicated their interest in monetising their surplus real estate to enhance their revenue structure.
Another trend witnessed in the real estate transactions side is investments made by Real Estate Investment Trusts. REITs are listed on overseas markets and allowing investors to invest into rental yielding assets in India, for example Ascendas which is listed in Singapore is developing and investing in IT Parks.
Going forward, we expect the Indian real estate market to witness greater M&A activity driven by consolidation and the growing maturity of the market. This activity would ideally be supported by requisite regulatory framework and inherent attractiveness of the real estate sector (which in turn is based on sound market fundamentals and relatively stable economic & political regime).
Moving from a single project/SPV level tie-ups, in terms of JVs between developer and investor companies or local and international developer, developer and funds (private equity/ hedge funds/asset management companies/ financial firms), the industry is likely to move towards portfolio-level and entity-level participation, both from domestic and cross border investors and mergers, forming new entities for undertaking development activity.
From the perspective of investment activity on the funds side, a progression towards takeover of portfolios of existing funds by larger and newer funds is expected as this would be a faster and easier mode of entering the market.
Also, with existing players intending to offload their portfolios to book profits/exiting their buyouts or diversifying into specific region or asset classes, real estate would evolve into a commoditising mode.
In the medium to long term, we foresee some activity towards acquisition of Indian players by international developers, active investment play by PE funds instead of the current trend of being a passive financial investor, and lastly a greater willingness to go for a dilution of equity by developers, construction and infrastructure companies, etc.
Also, once the industry begins to become a more formalised sector, REIT activity would come in taking in individual investor money into circulation along with making the sector more investment savvy in terms of fair and comprehensible valuations and traceability.

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