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Face to Face: The right time to invest is now


Kuldip Chawlla, director, Red Fort Capital, a realty-focussed private equity firm, tells Rajesh Kulkarni that the ongoing global liquidity squeeze has fuelled a 50% jump in funding proposals from leading developers from across the country

Could you give a background about Red Fort India Real Estate Fund?

Red Fort India Real Estate Fund I.L.P. is an international real estate private equity fund with an allocation of over US$400 million  (Rs199  crore) to the Indian real estate market. Our investors include international public, corporate and union pension plans, as well as insurance companies, foundations, endowments and governments.

It is a unique investment management firm with professionals that have over thirty years of Indian real estate experience combining international real estate development, finance and capital market expertise.

Our focus is on real estate investment opportunities in India, paying particular attention to the outskirts of congested cities and rapidly growing smaller cities across the country.

You have announced investments to the tune of Rs3,200 crore in the Indian real estate sector. Which are the cities you are targeting?

Since the onset of the global financial crisis, the number of proposals coming to us has increased by over 50%. Some of them are from reputed developers whose foreign partners have backed out. We are in the process of closing a number of transactions in key cities.

The plan is to pick up 50% stake each in 10-12 projects in cities such as NCR, Mumbai, Bangalore, Kolkata, Chennai, Pune and Hyderabad. These projects will primarily comprise residential, commercial, budget hotels, warehousing and logistics spaces.

What are the parameters you look for before deciding to invest in a particular project?

The micro market of the city of investment is very important. The rate at which jobs are being created show the sense of demand there will be for housing, whether it is affordable or luxury. This information can be attained from national databases and head-hunters.

The wages that will be given to the employees decide the type of the house that would be required, for example, a 2- or 3-BHK.

What are your investment plans with regard to affordable housing projects and budget hotels in Tier I & II cities?

We plan to build affordable houses in the range of Rs8-24 lakh. These houses will range from 400 sq ft to 1,000 sq ft. The aim is to target the middle income groups earning between Rs2 lakh and Rs6 lakh p.a. We have also developed a patented technology that uses fly ash based cellular light-weight concrete. It can help save 10% of the construction cost for high rise structures while using eco-friendly materials. We will construct affordable houses on the outskirts of congested cities.

We are also planning to invest in 4-8 budget hotels in Tier I and II cities. Our plan is to invest with experienced hotel operators to bring out a chain of budget hotels pan India.

Could you name the key projects your fund has invested in so far? What has been the scope of investment in each?

We have made significant investments in Bangalore, Chennai and Hyderabad. In Bangalore, we have tied up with the Prestige Group for two projects.

In Chennai, we have acquired primary residential land in close proximity to Ambattur, an emerging IT hub. We have also tied up with Kishorkumar Gokaldas, Promoters and Developers (KG Foundations Private Ltd), to develop a gated residential community on its 11-acre land parcel in Chennai.

The partnership is in line with our plans to invest up to US$100 million (Rs49 crore) in developing a range of residential, commercial, hospitality and logistics projects in Chennai.

In Hyderabad, we are partnering Indu Developers for the Bachupally residential project. In Kolkata we have tied up with Godrej Properties Limited.  We have taken a 49% stake in their IT park project Godrej Genesis, which is expected to generate sales of over Rs750 crore.

How do you assess the impact of the prevailing industry downturn and global financial turmoil on the long-term growth prospects of the Indian real estate sector?

The growth of the domestic real estate is attributed to various factors such as a growing economy and an increasing need for prime real estate. However, this boom is largely restricted to commercial office space, retail and housing sectors. The recent downturn in the US economy has affected both the Indian economy and the real estate sector.

The bankruptcy of Lehman Brothers and sale of Merrill Lynch to Bank of America has had an adverse effect on domestic realty players who had their liquidity funded by both these firms.

The IT segment, mainly funded by PE firms and exports to the US market, has seen a sharp drop in their net worth. This has forced investors and individuals to adopt a wait and watch approach.

The slowing demand and sluggish market conditions has fuelled a 10-30% drop in property rates across most cities.

What is your advice to investors looking at investing in the Indian real estate market?

As a result of the financial meltdown, global institutions are selling indiscriminately in India to cover their losses. This has impacted well structured, pre-negotiated deals which are now falling apart. The Indian real estate market is watered down, but, now is the right time to make a bold decision and invest in the market. It is a great time to go hunting.

How does the Indian realty market compare with other emerging markets as a preferred investment destination?

This year the BRIC economies alone have seen a correction of up to 50%. A part of the correction is associated with the slowdown in the growth of the emerging markets. The other reason is the global redemption pressure faced by hedge funds thus forcing them to sell in emerging markets. It is a good time to focus on the emerging markets and identify the best amongst the rest.

Has the current liquidity crunch and credit squeeze that developers face impacted your performance?

The Indian real estate market is high on unlevered investment. As a result the global credit crunch hasn’t really impacted the Indian real estate scenario much in that sense. The developers were hoping to get FDI’s but due to the global financial crisis, FIIs are pulling out of deals in India. The number of deals remain largely unaffected, but the money involved is now limited.

Lastly, what will be the key growth drivers for the domestic real estate sector?

The demographic profile is one of the key growth drivers. The emerging middle class and first time property buyers have created a huge demand for affordable housing options. The steady growth of the Indian economy  over the last few years is also an important factor.

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