Stronger Economy, Political Changes Have Foreigners Returning After Financial Crisis – India Is Luring Real-Estate Investors Again

India Is Luring Real-Estate Investors Again
Stronger Economy, Political Changes Have Foreigners Returning After Financial Crisis

Backers of the Palava community outside Mumbai, say overseas investors aren’t needed now. Atul Loke for The Wall Street Journal
MUMBAI—Encouraged by India’s strengthening economy and the pro-business agenda of Prime Minister Narendra Modi, foreign investors have begun to return to the India real-estate market after fleeing the country in the wake of the financial crisis.

But with memories of past losses still vivid, both domestic developers and foreign investors are taking different approaches to doing business.

Some developers, such as Mumbai’s Lodha Developers Ltd., say they are more financially self-sufficient and don’t need foreign partners at the moment.

“It’s a question of the maturity of the business,” said Abhishek Lodha, managing director of Lodha and son of the company’s founder. The firm is constructing what it says will be India’s tallest residential tower in Mumbai. It is also building a master-planned city named Palava just outside Mumbai that will cost more than 140 billion rupees ($2.3 billion) to construct.

Meanwhile, international heavyweights like Morgan Stanley MS +0.69% and Blackstone Group BX +0.66% LP, sovereign funds and other investors have become more choosy about with whom they will invest and are including more safeguards in their deals.

For example, it has become more common for them to invest through debt instruments that may include covenants requiring borrowers to get permission from the investors before spending a large amount of money.

“Investors are going to be a lot more cautious this time around,” said M.K. Sinha, chief executive at Mumbai-based IDFC Alternatives, 532659.BY -3.35% which plans to raise a $300 million-to-$500 million fund from foreigners and others to invest in Indian residential real estate.

Foreign investors flocked to India after the government passed new laws in 2005 greatly reducing restrictions on foreigners investing in real estate. From 2006 to 2008, private-equity funds and other investors pumped more than $15 billion into Indian property, according to data from Venture Intelligence. Sometimes investments were made directly into real-estate companies.

Many of the partnerships formed among foreign investors and Indian developers soured with the postcrisis decline of apartment and office sales and the wilting of the initial-public-offering market—both things foreign investors were depending on as part of their exit strategies. A number of partnerships dissolved into legal battles, and many international firms shut their India real-estate businesses.

“I’m kind of thrilled they left,” Sam Zell, who made his first and only investment in India in 2011, said in an interview. “For the first time in a long time, the Indian market is much closer to being balanced.”

Residents of the $2.3 billion planned community known as Palava, outside Mumbai, can take swings on its own nine-hole golf course. Atul Loke for The Wall Street Journal
Private-equity and other investors have put $675 million into Indian real estate in the first half of this year, more than double the investments made during the first half of 2013, according to data from Cushman & Wakefield. That is the most investment in the first half of a year since 2009, says the firm.

Today, developers and foreign investors believe the real-estate sector in India is poised for a turnaround. They expect Mr. Modi’s government to undertake much-needed reforms that will help boost the economy, creating spending power for buyers and ultimately demand for both residential and commercial real estate.

Active foreign players include private-equity giant Blackstone Group LP, which has become one of the country’s biggest office landlords. Earlier this year, the $174 billion Canada Pension Plan Investment Board said it had reached a deal with Piramal Enterprises Ltd. 500302.BY -0.59% , an Indian conglomerate, to finance residential projects.

In May, a consortium of investors led by Dutch pension-fund asset-manager APG Asset Management NV said it was working with investment firm Xander Group Inc. to invest $300 million in income-generating commercial properties in India.

In June, Canada’s Brookfield Asset Management Inc. BAM.A.T +0.31% launched a bid of $580 million to buy a portfolio of office properties called Unitech Corporate Parks, UCP.LN +0.48% comprising approximately 17 million square feet of existing space and development projects in India.

Bruce Flatt, chief executive of Brookfield, said in a shareholder letter in May that India, along with Brazil and China, looks attractive because the economic slowdown has led to better values for assets. “These markets offer us opportunities which have generally not been available to us before,” said Mr. Flatt.

Children play outside a building in Palava, on the outskirts of Mumbai, India. Lodha Development is building the master-planned city that will cost more than 140 billion rupees ($2.3 billion) to construct. Atul Loke for The Wall Street Journal
International firms that have stayed in India through the downturn, including Morgan Stanley, Blackstone, Walton Street India Real Estate Advisors Pvt., which is an affiliate of Chicago-based Walton Street Capital LLC, and Houston developer Hines, are looking to make fresh investments in India.

“We’re now getting more aggressive in the market,” said Yash Gupta, India head for Houston-based Hines, which expects to make its first investment since 2008 in the next few months.

Mr. Modi’s administration has already scored points with the real-estate and business community by taking a step toward creating a market for real-estate investment trusts, which will help provide an exit avenue for investors in commercial real estate.

“I wouldn’t say the tide has completely turned,” said Sanjay Verma, chief executive of Cushman & Wakefield’s Asia-Pacific division. “But we’re seeing a revival.”

Foreign investors, however, are finding a different landscape from the one that existed few years ago. Developers are less hungry for foreign investment, especially those who own large pieces of land and simply need to build residential projects on them. They can typically fund their developments with property presales and, if needed, by using construction finance, which is available from state-run banks at annual interest rates of 13% to 14%. In comparison, structured debt from institutional investors costs more than 20%.

For example, nearly a decade ago, Lodha was one of the many small development companies that soaked up the first wave of foreign investment in Indian real estate. Lodha executives say the company’s sales now generate so much cash that foreign investors aren’t as critical as they once were. Last year, Lodha delivered 8,500 homes and had sales of 85 billion rupees, compared with about 10 billion rupees in annual sales a decade ago, according to Mr. Lodha, the managing director.

Lodha and other healthy businesses in India “are very comfortable without taking on a lot of external capital, whether foreign or Indian,” Mr. Lodha said.

Source: Wall Street Journal