- Amit Bhagat, CEO & Managing Director, ASK Property Investment Advisors
Established in 1983, ASK Group is known for its strong research-based investment management, asset management, private equity, and more. Currently managing assets of over Rs 15,000 crore across seven offices in India, it believes in building long-term value. What´s more, ASK Property Investment Advisors invested about Rs 600 crore during the last year through three equity deals in real-estate projects in the country. Amit Bhagat, CEO & Managing Director, ASK Property Investment Advisors, shares more on the funding scenario for the real-estate market and solutions for the long term, in conversation with SERAPHINA D´SOUZA.
Please share an overview of the scenario for investments in the real-estate sector in India.
The current times are challenging and difficult due to dismal interest of investors and no urgency from users. We have seen the boom period of 2002-2008, which also included irrational exuberance by investors and private equity players. There were more than 60 real estate private equity players in the beginning of 2008, whereas the current players in 2016 are not more than 12. Post global crisis of 2008, all private equity players have changed the focus to structured debt. This change in strategy, combined with mushrooming of NBFC´s (non banking finance companies), have led to increased debt with every real-estate player. The quantum of debt infused through these so called private equity funds and NBFC´s will be approximately US$ 7-10 billion post global crisis. The industry needs debt, but available is high cost debt only. Majority of the developers are equally to be blamed for this crisis, since they have not focussed on execution, quality, delivery, affordability, post delivery maintenance and customer satisfaction. When the investor has withdrawn and user is in no hurry to buy, the developer is not able to manage the cash flows. The quantum of capital, which has been raised and put to use by private equity, NBFC´s, banks, IPO listing and high net worth individuals, is also leading to increased under construction and completed supply of residential units.
Consolidation of the industry has begun, because developers who have an impeccable track record of delivery, quality and experience will be able to sell their product. Also, real-estate regulation is a reality, which will bring-in governance and safeguard the lifetime savings of the buyer. The enforcement of these regulations will put further pressure on developers to optimise their capital efficiencies.
On the commercial side, we have seen interest of institutional, sovereign and large private equity funds for the last two-three years due to no construction risk, monthly fixed rentals, quality of tenant and future expectation of reduction in interest rates. REIT regulations and the recent announcement of exemption from dividend distribution tax has paved the way for listing of REITs in India, and the potential of grade A assets likely to be listed can be in the range of $10-15 billion.
Introduce us to the services and research you provide for the sector.
We are a private equity fund house focussed in the mid-segment residential real-estate space. We are investing in project-level partnership with strong regional players and targeting an end product of Rs 25 lakh to Rs 1 crore in Pune, Bengaluru, Chennai and NCR. For Mumbai, the ticket size is Rs 1 crore to Rs 2 crore.
We are focussed on equity right from inception and have been clear that the industry requires equity and not an overdose of debt. The end product price may not go up; and the focus has to be on margin of profit by selecting the right growth corridor or location, with a strong regional player at entry price with a margin of safety. Cash flows are important, and if you can manage negative working capital, the profits are satisfactory.
Along with primary research from a third party, we have our inhouse asset management team in every city that does a secondary market search and then validates the findings. We have been in this sector for 20 years and have the experience of lending and advising in all major cities of the country.
Private equity funds are finding it hard to raise funds overseas with investors not confident that they will make decent money. Please share your take on this. Sovereign players and large institutions and funds have set up shop here, and small players have taken a backseat. Global investors are not directly going through India-dedicated funds, but prefer giving money to large players for emerging market allocation. Unless one has an impeccable track record of delivering money back to investors, raising of additional funds is difficult. The due diligence will be extensive for the team, process, strategy, risk management framework, asset management focus, performance as delivery of returns, etc; everything is taken into account before allocation.
Are investors cautious about the sector?
Investors are cautious, especially the retail investors due to completion risk, governance, over commitment and excessive leverage.
What about the interest of foreign investors in the real-estate sector?
After the liberalisation of Foreign Direct Investment Regulations, all impediments faced by foreign investors have been resolved by the government. Foreign investor interest is coming back, but they are not sure which player to rely on, and hence, conducting comprehensive due diligence.
How much has the sector developed, and do you see the mindset changing in future?
India is one of the only bright spot among emerging markets. Registration data for major cities is also intact and reflects stable inherent demand from actual users. With macro fundamentals being in place and micro data expected to show positive results, we have seen the interest of large institutional and sovereign players, and can expect to see a large number of other investors to follow in 2016 and 17. This is a counter-cyclical opportunity. But as the number of investors increase, the opportunity will diminish gradually over the next 24 months.
The process of fund closures that took six to eight months earlier is now taking 24 months.
Domestic funds take almost 9-12 months; and for offshore, it takes 18-24 months due to comprehensive evaluation by investors.
You recently phased funds for domestic and off-shore investors for mid-segment housing projects. Why only mid-segment housing?
We have just announced closure of the third domestic fund of Rs 1,400 crore. We are raising off-shore funds as well. We have stuck to mid-segment because the entire growth story is about middle-income housing, and affordability is important. It is the middle-class which is driving the India story in the consumption space; and, we will stick to this.
Also, any plans to look at commercial?
Retail malls are going through a churn because of e-commerce. So, few malls completely owned by developers will see successful revenue sharing model. In this sector, the yield expectation has to be less and one needs long-term money. SEZs and commercial office also require a huge amount and long-term institutional capital, which is not available in domestic markets. We have stayed away from commercial because of the absence of the REITs and have focused on liquidity-driven strategy.
What´s your take on the Real-Estate Bill and the 2016 Budget?
The Bill will actually increase demand for equity because of requirement of timely delivery and imposition of delayed interest payable to buyer and penalty by the regulator. These are user-friendly regulations. Regulation is going to be healthy for the industry; it will bring in more investors. We have seen it in mutual funds, in telecom and many other sectors.
Also, the Budget has clearly defined affordable housing as the focus, for which tax exemption is provided. REIT has also been exempted from dividend distribution tax and is being encouraged because they unlock the capital of the banking system.
Where is the market heading and what are your expectations?
One may not see too much capital appreciation in prices of residential units. Values may remain stable in the short or medium term. Individual investors should not rely on immediate appreciation. During consolidation, everyone will not make money. And, we have to get aligned to this new paradigm shift in reality. With an enforcement of regulation, this will emerge as a more matured sector with many large players, and will attract institutional capital.
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