REIT is a de-risked asset and has the potential to raise around $10 billion every year

01 Oct 2014 CW Staff

The company has recently launched its 10th fund. Please elaborate upon the details of this fund. What are your offerings to the real-estate sector?
The ´Milestone Opportunities Fund 10´ is a structured investment opportunity focused on residential real estate. It is a close-ended fund with a relatively short tenure of three-and-a-half years. It is competitively priced and will invest in mid-segment residential development in high-potential micro-markets of Mumbai, New Delhi, Bengaluru, Chennai and Pune. It is a Rs 500-crore fund with an upsize option of Rs 200 crore targeting an internal rate of return (IRR) of 24 per cent.

The company has raised and deployed Rs 2,876 crore in the real-estate segment, of which we have deployed Rs 1,640 crore into commercial assets and Rs 1,236 crore into residential. We have real-estate development funds as well as private REITs (rental yield funds) in the real-estate space.

Many developers are eyeing Tier-II and Tier-III markets for expansion. How has your experience been in dealing with these emerging markets?
Milestone has been one of the early investors into these markets, especially in cities such as Hyderabad, Pune, Rajkot, Pondicherry, Jaipur, Nagpur, etc. Our experience has been positive to excellent, given that we had partnered with established mid-sized developers with a good track record.

We have also garnered healthy returns from these markets with timely exits as well. Recently, we divested a premium commercial space in Hyderabad at a healthy investment multiple of 1.53x making us one of the few players to exit in a challenging market such as Hyderabad. With our new fund, we have earmarked investments in cities such as Pune, but in select micro-markets there along with those in the Tier-I cities.

Tell us about the support you provide to projects. Also, share your funding experiences.
The company has a unique ´active management´ philosophy and, through this, we have provided not only financial support to various projects but, most important, technical and marketing support as well. With an in-house property and projects management team, the investment teams get operational support right from project design to asset management. The teams actively engage with developers to bring in construction and sales-related expertise and reputed IPCs such as JLL, Knight Frank, Cushman & Wakefield among others to help maintain our commercial assets to world-class standards. Owing to our extensive network of property consultants, we also assist our investee developers to achieve their sales and marketing objectives.

You also provide funds to the warehousing segment. Tell us more about these transactions. What is the rate of interest involved?
We have invested in two warehouses in the country including the Acorn warehouses in Bhiwandi, Mumbai and Dharuhera in NCR. These are our flagship warehouses that house key tenants such as Flipkart, Tesco, Damco, TCI and Amtec auto. We recently exited our investment in the Bhiwandi warehouse at a healthy multiple of 1.83x. We are in active discussions to exit Dharuhera as well. Typically, warehouses offer an IRR of 16-20 per cent.

Against the backdrop of the proposed development of 100 smart cities, there is a need to have sovereign funds that can provide a longer time frame of investment horizon to invest in smart cities. What is the opportunity you foresee in this segment?
We believe that initially the Government will have to drive the development of smart cities. Once the basic locations are finalised and the land acquired by the Government, it can attract long-term patient capital from sovereign funds, pension funds, etc, in order to participate in the growth story. We will have to adopt a wait-and-watch policy at the moment.

Recovery of loans is a major area of concern in the real-estate sector as projects get stuck owing to clearance issues. What is the company´s performance in the case of recoveries?
In private equity such as ours, investments are made at a portfolio level rather than entity level. All investments undergo strict due diligence and pre-investment asset or project evaluation to mitigate most risks involved in real-estate developments or projects. Also, most investments are asset-backed along with promoter guarantees, hence making them rather safe. Most investments are made in project stages that are either cleared by various regulatory bodies or in the process of obtaining clearances. Having asset-backed investments ensures that the developer pays us our agreed returns and we have done well on the recoveries front and, to date, have not faced any roadblocks in any of our divestment processes.

How will the issuance of REIT ease funding options?
REIT will prove an effective tool for enhancing investments in commercial real estate. As it will only look at completed and income-generating projects, development risk is minimal for investors. REIT is a de-risked asset and has the potential to raise around $10 billion every year. Developers will get a new avenue to cash out their assets by directly floating REITs and listing them on stock exchanges. India has 400 million sq ft of office and mall properties valued at $60 billion (Rs 3.72 lakh crore). Earlier, developers could either go for private equity funding, strata sales or rental discounting. Now, they can float their own REITs and list them on exchanges. This will serve as an added liquidity option available to developers and owners of commercial real estate.

This time seems best to raise capital in the real-estate segment. What is your suggestion to developers?
Yes, the sentiment is positive from a long-term perspective and the Government is taking the necessary initiatives to boost the growth of the real-estate sector in the country. However, the most sustainable growth mechanism will be to invest or develop projects in the mid-income and affordable housing spaces to address the huge latent demand for housing. Owing to the high prices of real estate in urban cities, people prefer to take up accommodation on a rental basis instead of purchasing their own houses. Increase in the number of mid-segment housing projects will not only attract benefits from the Government but motivate people to buy rather than lease. Also, developers stand to benefit immensely from mid-segment housing projects as their investment is relatively lower and the time taken to sell off the inventory is shorter owing to the higher sales velocity.

Milestone Capital Advisors has invested in over 25 million sq ft of projects in India. How are you planning to use your expertise to leverage the real-estate space?
We are bullish on the residential space at the moment. We believe that the cities of Mumbai, NCR, Chennai, Bengaluru and Pune will continue to witness increased demand for mid-income residential housing space and have hence positioned our new offerings accordingly. Going forward, we will also look at raising a commercial fund and consider listing a few of our commercial assets as a REIT once the guidelines and regulations are finalised by SEBI.

Rubi Arya, Vice Chairman & Director, Milestone Capital Advisors Ltd A privately held alternative investment advisory firm, Milestone Capital Advisors Ltd specialises in developing highly innovative funds in the real-estate space. Having raised funds of about Rs 3,000 crore, the company offers pioneered products in private real-estate investment trust (REIT) and mezzanine investments in the real-estate segment. Rubi Arya, Vice Chairman & Director, Milestone Capital Advisors Ltd, shares the company´s lending portfolio and funding experiences with CW. The company has recently launched its 10th fund. Please elaborate upon the details of this fund. What are your offerings to the real-estate sector? The ´Milestone Opportunities Fund 10´ is a structured investment opportunity focused on residential real estate. It is a close-ended fund with a relatively short tenure of three-and-a-half years. It is competitively priced and will invest in mid-segment residential development in high-potential micro-markets of Mumbai, New Delhi, Bengaluru, Chennai and Pune. It is a Rs 500-crore fund with an upsize option of Rs 200 crore targeting an internal rate of return (IRR) of 24 per cent. The company has raised and deployed Rs 2,876 crore in the real-estate segment, of which we have deployed Rs 1,640 crore into commercial assets and Rs 1,236 crore into residential. We have real-estate development funds as well as private REITs (rental yield funds) in the real-estate space. Many developers are eyeing Tier-II and Tier-III markets for expansion. How has your experience been in dealing with these emerging markets? Milestone has been one of the early investors into these markets, especially in cities such as Hyderabad, Pune, Rajkot, Pondicherry, Jaipur, Nagpur, etc. Our experience has been positive to excellent, given that we had partnered with established mid-sized developers with a good track record. We have also garnered healthy returns from these markets with timely exits as well. Recently, we divested a premium commercial space in Hyderabad at a healthy investment multiple of 1.53x making us one of the few players to exit in a challenging market such as Hyderabad. With our new fund, we have earmarked investments in cities such as Pune, but in select micro-markets there along with those in the Tier-I cities. Tell us about the support you provide to projects. Also, share your funding experiences. The company has a unique ´active management´ philosophy and, through this, we have provided not only financial support to various projects but, most important, technical and marketing support as well. With an in-house property and projects management team, the investment teams get operational support right from project design to asset management. The teams actively engage with developers to bring in construction and sales-related expertise and reputed IPCs such as JLL, Knight Frank, Cushman & Wakefield among others to help maintain our commercial assets to world-class standards. Owing to our extensive network of property consultants, we also assist our investee developers to achieve their sales and marketing objectives. You also provide funds to the warehousing segment. Tell us more about these transactions. What is the rate of interest involved? We have invested in two warehouses in the country including the Acorn warehouses in Bhiwandi, Mumbai and Dharuhera in NCR. These are our flagship warehouses that house key tenants such as Flipkart, Tesco, Damco, TCI and Amtec auto. We recently exited our investment in the Bhiwandi warehouse at a healthy multiple of 1.83x. We are in active discussions to exit Dharuhera as well. Typically, warehouses offer an IRR of 16-20 per cent. Against the backdrop of the proposed development of 100 smart cities, there is a need to have sovereign funds that can provide a longer time frame of investment horizon to invest in smart cities. What is the opportunity you foresee in this segment? We believe that initially the Government will have to drive the development of smart cities. Once the basic locations are finalised and the land acquired by the Government, it can attract long-term patient capital from sovereign funds, pension funds, etc, in order to participate in the growth story. We will have to adopt a wait-and-watch policy at the moment. Recovery of loans is a major area of concern in the real-estate sector as projects get stuck owing to clearance issues. What is the company´s performance in the case of recoveries? In private equity such as ours, investments are made at a portfolio level rather than entity level. All investments undergo strict due diligence and pre-investment asset or project evaluation to mitigate most risks involved in real-estate developments or projects. Also, most investments are asset-backed along with promoter guarantees, hence making them rather safe. Most investments are made in project stages that are either cleared by various regulatory bodies or in the process of obtaining clearances. Having asset-backed investments ensures that the developer pays us our agreed returns and we have done well on the recoveries front and, to date, have not faced any roadblocks in any of our divestment processes. How will the issuance of REIT ease funding options? REIT will prove an effective tool for enhancing investments in commercial real estate. As it will only look at completed and income-generating projects, development risk is minimal for investors. REIT is a de-risked asset and has the potential to raise around $10 billion every year. Developers will get a new avenue to cash out their assets by directly floating REITs and listing them on stock exchanges. India has 400 million sq ft of office and mall properties valued at $60 billion (Rs 3.72 lakh crore). Earlier, developers could either go for private equity funding, strata sales or rental discounting. Now, they can float their own REITs and list them on exchanges. This will serve as an added liquidity option available to developers and owners of commercial real estate. This time seems best to raise capital in the real-estate segment. What is your suggestion to developers? Yes, the sentiment is positive from a long-term perspective and the Government is taking the necessary initiatives to boost the growth of the real-estate sector in the country. However, the most sustainable growth mechanism will be to invest or develop projects in the mid-income and affordable housing spaces to address the huge latent demand for housing. Owing to the high prices of real estate in urban cities, people prefer to take up accommodation on a rental basis instead of purchasing their own houses. Increase in the number of mid-segment housing projects will not only attract benefits from the Government but motivate people to buy rather than lease. Also, developers stand to benefit immensely from mid-segment housing projects as their investment is relatively lower and the time taken to sell off the inventory is shorter owing to the higher sales velocity. Milestone Capital Advisors has invested in over 25 million sq ft of projects in India. How are you planning to use your expertise to leverage the real-estate space? We are bullish on the residential space at the moment. We believe that the cities of Mumbai, NCR, Chennai, Bengaluru and Pune will continue to witness increased demand for mid-income residential housing space and have hence positioned our new offerings accordingly. Going forward, we will also look at raising a commercial fund and consider listing a few of our commercial assets as a REIT once the guidelines and regulations are finalised by SEBI.