Why Indian real estate is "tip of the iceberg" opportunity

ICICI Venture was an early player to foray into real estate when IndiaÆs regulator SEBI announced guidelines for real estate venture capital in 2004. Kishore Gotety - who heads the real estate investments business for ICICI Ventures - explains why he remains bullish on India's real estate opportunity despite high valuations.

Why did ICICI Ventures enhance focus on this area?
Of our earlier private equity fund of $250 million about 15% was invested in real estate. Encouraged by the experience (ie the returns) and by the opportunity the regulations provided we raised a dedicated real estate fund.

What is the size and who are the investors?
We raised $550 million. A little less then 40% or $200 million is from overseas institutions. The balance is broadly equally split between high net worth individuals and domestic banks and institutions.

What are the terms?
The fund is 7+2 years. For non-resident Indians, the minimum investment was $250,000. For rupee investors, the minimum was Rs50 million.

How much is invested and in what type of real estate?
In land terms we have committed and paid for 300 acres and are negotiating for another 250 acres. We generally do not look at investments less then $10 million which translates into different acreage in different cities.

The focus of the fund will be to develop, acquire, lease and sell quality office buildings, residential premises and retail spaces and in hospitality that are attractive to the end users. We are not stage-biased, as in we can invest in greenfield projects as well as in projects currently under development or construction. We also look at investing in completed projects û especially in the commercial space segment.

What are your qualitative investment parameters?
Real estate is a market which has professionalised recently. Thus, we are willing to take measured risks on the quality of the partners with which we work and obviously we are open to the fact that markets could fluctuate ie prices. We will not take a risk on regulations and quality of title deeds. To illustrate, we get many proposals where land currently marked under a green or no Development zone is likely to get permissions for development, due to an expected change in regulation. We do not like to speculate on such likely changes in regulations.

This space is getting very crowded with a number of players. What is you competitive advantage?
I would draw an analogy with the banking sector. Ultimately, the Indian private sector banks, despite starting much later then some of the foreign banks, have succeeded in building a franchise and winning market share. I attribute this success to an in depth understanding of the country in which you do business and how best to mitigate risk. As domestic players in real estate we have the same advantage. For example, when dealing with developers I know that my entire check list of conditions precedent may not be fulfilled before the investment. But I also know which ones I can afford to have some flexibility on. Similarly, I believe being headquartered locally gives me the agility and nimbleness which stands me in good stead while closing deals.

Secondly, we are amongst the only highly successful private equity players in India who are now investing in real estate. Over the past 15 years, we have not merely been money providers but have played a crucial role in developing successful businesses and even more successful entrepreneurs. We are committed to pursuing a long-term approach in creating and cultivating relationships with operating partners. Our deep financial resources allow us to support ongoing investments for portfolio companies and properties, to tolerate temporary fluctuations in the market and to commit quickly and with confidence to a transaction. We enjoy a strong network of domestic and international relationships with leading financial institutions, operating partners and various governments.

In India the real estate market is generally perceived as opaque and hence risky. What is your view?
While this may have been true in the past it is changing rapidly. Developers understand the importance of being transparent. Equally, cash sales are declining as developers understand that the new target market is salaried people and those who take loans. I would also emphasise that with real estate there is always a tangible underlying asset. To that extent, the risk is always lower than equity, as an asset class.

Real estate prices in some pockets have witnessed a sharp increase causing many to term this IndiaÆs new bubble. Do you agree?
We are keeping a close watch on prices in specific areas. We do anticipate there could be some kind of correction in a few localities. However, holistically, we still believe the opportunity in India which has been identified is only the tip of the iceberg. Improving infrastructure, increasing disposable incomes, easier access to financing will all ensure that the market remains buoyant. What might change however is the asset focus û in a growing market for instance, the focus could change to affordable housing from an ultra luxurious product. Like all industries, real estate may witness a slight churn before it stabilises but for long term investors such as ourselves there is no cause to be unduly worried.

We actually feel the next acid test will be execution ie will developers be able to deliver timely and quality construction as promised?

Specifically which regions in India are you bullish on?
Within our above defined parameters we are willing to look at opportunities across the country. I would say more generally, the South û Hyderabad, Bangalore and Chennai are doing well. Pune also looks very good. Emerging cities such as Chandigarh, Vadodara, Chandigarh, Nagpur will attract attention going forward.