How PE Investors Squeezed Developers During 2008 Bust ?

Following the slump in late 2008, many projects invested in were either significantly delayed or, in some cases, found to be unviable in the changed scenario and it is quite likely that a large number of investments are currently incurring losses.

Most investments have clauses in the form of put or call options which protect the investor and make it mandatory for the developer to buy-back the securities held by the PE investor. Also, there are punitive clauses which enable the investor to take control of the project if it is not completed.

Lodha Developers – HDFC Property Ventures:

The HDFC Shareholders‟ Agreement provides the Investors on and from the Investors Exit Date (May 2, 2013 if 95% of the cash flows of the project are not received till then), a put option, in which the Investors shall have the right to call upon our Company to purchase from the Investors all the securities held by them

In the event, other than on the occurrence of a force majeure event or reason approved by a unanimous decision of the board of Lodha Healthy, if the Project is not completed within a period of five years from the date of commencement of the development of the project, then the Investors shall have an additional right to appoint majority directors on the board

Lodha Developers – Deutsche Bank (DB)

DB had granted another Lodha subsidiary the option to purchase the debentures or the converted equity shares of Cowtown prior to Dec’10, failing which DB would be the owner of 99% of Cowtown and, in turn, the owner of the mortgaged land parcels in Thane, Lower Parel and Malabar Hill in the event of a default by LHRB. In our view, this means that if Lodha does not buy back the debentures from the current debenture holders, it would lose control of several valuable land parcels for an amount of just INR16bn

Parsvnath-Sun Apollo Ventures

our company (Parsvnath) has granted to the investors (Sun-Apollo) an option, exercisable at any time on or subsequent to 48 months after the first closing date, to sell to the promoter, all the securities of Hessa (Parsvnath Exotica-II) held by the investors and upon exercise of such option, our company shall be obliged to purchase the securities on the terms and conditions contained in the investment agreement.

Emaar MGF-New York Life Investment (NYLI), Jacob Ballas Capital (JBC) and EIF

the Investors were granted the right to require Emaar to purchase all the Equity Shares subscribed for by the Investors at the per share price at which the Investors had acquired the Equity Shares.

Entertainment World Developers Ltd (EWDPL)-ICICI Ventures Ltd

In the event the IPO does not take place by Feb 15, 2011 the investor has the right to require either the promoters of EWDPL or EWDPL itself purchase all equity shares and optionally convertible debentures and/or redeem all optionally
convertible debentures at a fair value.

Raheja Universal-Urban Infrastructure Venture Capital (UIVC)

Raheja Universal is required to provide the investor an exit within seven years from the date of investment, i.e. by March 2014 or such extended period as may be determined by the investor, through an IPO or strategic sale. In the event the company is unable to provide a suitable exit option to the investors, the investor shall be entitled to exercise a put or call option requiring Raheja to purchase all of its shares in the project or to sell all of its shares in the project to the investor.

The Evils of Private Equity Capitalism led many of these Greedy Realty Developers to Hold on to abnormally High Property Prices when in reality, they offer no value for the Dream Home the hardworking and Honest Tax Paying Citizens deserve.

Total Private Equity Investment in Property

Here is an excellent piece of data that shows historical Private Equity Investments in the Indian Real Estate sector which has now touched a whopping $8.8 Bn.

The following Charts Show the Data.

Chart - 2


You can also download the same data sheet here. [PDF}

Residential Boom - Spectulator Driven

PropEquity data suggests a recovery in sales volumes in CY11 ytd. But our channel checks suggest this is speculator driven and not sustainable as home buyer sentiment remains weak.

Ears on the Ground suggest that rising speculative demand (encouraged by the low down payments), especially in cities, such as Gurgaon, could be boosting sales volumes which we believe is not sustainable. We believe that the sentiment of genuine home buyers remains weak and are holding back on purchases in anticipation of a 15-20% price correction. The affordability [Price vs Mortgage Rates] remains under pressure and, hence, real buying sentiment remains weak.

Financial Institutions and Banks turning cautious towards rescheduling debt or issuing fresh loans, developers are approaching Non Banking Financial Companies (NBFC) which are issuing Non Convertible Debentures (NCD) at 16-20%. As per National Securities Depository Ltd (NSDL) and various press reports, real estate companies like Puravankara and Kalpatru have raised funds at 16% pa while Century real estate has raised funds at 20% pa.

There is a talk to bring Real Estate Developers, Builders and all bad sections of the society indulging in Black Money transactions under the ambit of "Prevention of money Laundering Act" as they have evaded massive taxes much more than 2G Telecom Spectrum Scam in India.

Gurgaon Sales Up - Mumbai Flat

The residential volumes in Gurgaon increased 50% MoM on account of higher sales in new markets, while Mumbai volumes remained flat MoM.

Gurgaon recorded strong volumes in February at 7.7msf (vs. 5.2msf in January ―11) backed by absorption in New Gurgaon (prices at Rs 3,000–4,000psf, Fig 9) and Southern Periphery Road (Rs 5,000–7,000psf). There have been a number of pre-launches with actual roll-out slated for March-April ―11. Even though the general sense in the market remains cautious, a good product at a fair price is usually well received (~1msf launched by Alpha G Corp in Sec-84, Gurgaon was rapidly sold off).

Volumes in Mumbai came in at ~4msf (vs. 3.9msf in January and 4.4msf in December ―10) mainly on account of steady sales in the western suburbs (mainly Virar) and New Mumbai (Panvel, Ulwe). Prices are muted and we see a few developers offering deals though this is not widespread as yet.

Commercial Real EstateEven though the interest in commercial properties seems to be improving, volumes remain flattish. Inventory levels remained high both in Gurgaon and Mumbai. Rentals seem to have bottomed out and a material uptick may not become visible until inventory levels climb down.

Real estate developers may see some debt repayment–related pressure over Q1FY12, which in turn may trigger a further reduction in property prices.

Gurgaon + Noida + Chennai Property Markets Lead in Recovery

A comparison of volumes during the peak 2007 and end of 2010 data suggests that Gurgaon, Noida / Greater Noida and Chennai property Markets recovered to cross the previous peak volumes consistently for the last 6 months while the rest of India exhibited mixed trends.

Noida / Greater Noida - Sold 2 Mn SFT / Month in 2007. The figure went up as high as 10 Mn SFT / Month in the last 6 months and has started to cool off with rising interest rates.

Gurgaon - From a lull in mid-CY10, demand for residential property in Gurgaon has recovered smartly. Price correction may still be staved off for another 4-6 months, post which prices may correct by 15%, we believe. The key here would be to watch for supply from investors in the secondary market, as this could lead to an earlier price correction.

Chennai - Volumes in Chennai are currently at their best ever in history. We believe Chennai volumes should remain strong vs. FY09 levels, driven by the IT industry and good affordability in the suburbs. Inventory levels though remain a worry, in our opinion.

Bangalore - The Bangalore residential market seems to have entered a rut with volumes unable to break out of the 3-4 mn sqft range. An interesting feature is that the size of homes sold has come down in the past 3-4 months suggesting that buyers in Bangalore are downtrading in the face of a 150bp increase in interest rates and a 15% rise in prices. Affordability in Bangalore is little high and hence buyers are not willing to stretch themselves with the Poorest City Infrastructure compared to all other Tier-I cities in India.

Hyderabad - Hyderabad continues its poor performance as the uncertain political situation and the consequent lack of clarity on Hyderabad’s status as the capital city seem to have led to buyers staying away.

Kolkata - Kolkata witnessed a good demand environment in 2H CY10, with volumes consistently above 1mn sqft. The unsold stock with developers has come off significantly over the last 2.5 years

Mumbai Metro Region - Demand for residential property in MMR slowed down considerably since the early part of the year. While the slowdown in square feet terms looks muted, in terms of units sold at 3,101, Dec 2010 was the second-slowest month since Dec 2008 (2,925). This is because sales of larger-sized apartments (premium homes) are continuing; the slowdown seems to be more in mid-segment homes due to rising interest rates.

Residential demand Weakens

Recent data suggests absorption (demand) volume in India’s top 7 cities has either been flat or declined over the past two quarters. The Mumbai region and Pune have reported sharp drops, while Gurgaon and Bangalore have shown flat-marginally negative growth.

While developers could hold prices firm in the near term due to stable balance sheet liquidity, we think this will only hurt demand as interest rate rises and higher property prices will curtail affordability.

Likely stringent measures by RBI towards the sector could curtail credit to the sector and hurt execution. Looking ahead, the risks of sticky inflation, further rise in interest rates and more stringent RBI policies imply further downside risk to demand. However, the Job market is looking really good and hence Developers should reduce their margins a little bit which will get the consumers back to their doors.

Private Equity in Indian Realty

After a weak 2009, private Equity Funding in Realty saw a pick-up in 2010. ~$1.5 b (~Rs68 b) was invested across 46 deals in the sector vs $749m across 23 deals in 2009. To put this in perspective of sector funding, $1.7b equity was raised through IPO/QIP route in CY10. Of the total PE pool.

Developers are increasingly approaching PE funds, likely due to lack of other options. As an after math of the bribe-for-loan scam, banks are tightening lending to real estate firms. Also, falling sales volumes and lack of appetite for equity raisings have worsened their case. Hence, more developers across India now are turning to PE funds.

Recent PE Deals Include - Parsvnath raised Rs1.0b by selling 49.9% stake in Ghaziabad project to SUN-Apollo India RE; 2) ASK's Property Fund is investing in two Pune Projects of Rs5.25b; 3) Red Fort Capital is looking to invest Rs1.5b in Ansal API’s “Esencia” township Gurgaon; 4) Kumar Urban may raise Rs1.1b by divesting stakes in five Mumbai and two Pune projects.

Housing Finance Scam - Realty Stocks in Blood Bath

The Indian Real Estate Stocks which have always been a pack of cards falling at the slightest jerks have taken a severe beating on the Stock Exchanges today. RBI which has been an indirect hand in glove to the real estate industry backed by Government sponsoring Black Money / Unaccounted - Non taxed Money to be used in deals makes this the least preferred choice for investment.

Investors deserted REal Estate Stocks in yesterday's trade and continued their selling spree in early trade today. Almost all the stocks are down between 5% to 10% and here is how the Indian Real Estate Stock Index looks like.