Realty sector: $3.2-bn PE exits in 4 years!

The real estate sector in India has seen $3.2 billion of private equity investor exits in the last four years, according to a white paper issued by Jones Lang LaSalle India.

In rupee terms, this amounts to about Rs 14,720 crore (Rs 147.2 billion), considering the rate of Rs 46/dollar suggested in the study.

Shobhit Agarwal, joint managing director (capital markets), Jones Lang LaSalle India, said, "The total PE exits from the real estate sector in the 24 months that started January 2012, would be of $3 billion.

"We expect PE exits of about $1 billion in 2012."

He, however, added the total number of exits during the period would not be known.

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The majority of the funds invested in 2007-08 are exiting at the end of the fund life, and this year would see more PE exits from the sector, stated the paper 'Reaping the Returns -- Decoding Private Equity Real Estate Exits in India'.

"Of the private equity investments of circa $13 billion made in Indian real estate, our analysis reveals about $3.2 billion of exits have been recorded so far, out of over 80 transactions.

"Our data sample, covering about $3.2 billion of exits, includes a variety of asset classes, geographies and fund types," the paper stated.

By asset class, the share of PE exits includes 46 per cent residential, 22 per cent office space and seven per cent of the mixed-use portfolio.

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The exits have been recorded at an average return multiple of about 1.24.

While the commercial sector recorded an average return multiple of 1.2, the return multiple in the residential sector was about 1.1.

Other asset classes included in the study were retail, townships, warehousing, the mixed-use portfolio, etc.

The low returns were primarily owing to global recessionary trends.

"Some of the notable transactions that yielded exceptional returns in the sector were completed by Wachovia, HDFC, Kotak Realty, ICICI Ventures and Indiareit, primarily in commercial office assets.

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"Significant losses were, however, recorded by a few offshore PE funds, largely in south India-based transactions," the paper stated.

PE investment into real estate was the highest in 2007, about $6.76 billion compared with $1.29 billion in 2006.

In 2008, PE investment in realty stood at $3.31 billion, falling to $0.88 billion in 2009, $0.94 billion in 2010 and $0.85 billion in 2011.

"Since the majority of investments in India were in 2007-08, 2012-13 is the opportune time to push forward divestments," the study stated.

The reasons for exits included market-driven opportunistic exits, distressed sales (which are set to lose prevalence) and fund-raising activities.

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"With over 15 funds currently in a fund-raising mode or preparing for it, we expect exits to dominate the fund management business in 2012," the paper added.

"In comparison to the global scenario, in which distributions by real estate private equity funds of 2006-07 have been about 4.5 per cent of the capital called, Indian real estate investors have returned close to 24 per cent of the capital invested.

"This indicates the performance of Indian real estate has been, to some extent, less affected by global events than in other countries," stated the report.

While exits of domestic and offshore investors, along with PE funds, have been almost equal in terms of numbers, at 52 and 48 per cent, respectively, in terms of value, almost 74 per cent of the exits were attributed to foreign funds.

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This is primarily because of the large deal sizes from offshore investors.

Almost 69 per cent of the exits, in terms of value, was through promoter buybacks.

This reflects lack of sufficient price discovery mechanisms in the exit process, along with the lack of secondary investors.

Policy-related and regulatory hurdles also exist, and these have to be addressed to make the industry more attractive to PE investors, the report stated.

The industry is looking forward to policy measures like the alternate investment fund regulation by the Securities and Exchange Board of India and the introduction of a real estate investment trust.

"Additionally, we also foresee new categories of investors such as insurance companies and pension funds becoming active in the space for completed assets," the report added.