Mondrian Alpha has been providing financial services advice to credit and real estate investors for the past 10 years. Our real estate practice has helped businesses that invest in both direct real estate and real estate backed opportunities to sustain growth in an evolving market. Whether it be growing teams, developing new markets, succeeding senior team members or even helping our clients deploy their capital. To support our clients who attempt to break into the Asian market from an opportunistic view or an increased investor demand to diversify, we have put together this piece of research, from readily available data and interviews with several Asian Real Estate investors.
Asia is made up of 48 countries so for me to summarise all 48 countries into one, short, easy to read article is somewhat challenging. Similarly, it would be difficult to group the 5 countries of the Nordics into one article when it is already widely understood that each country provides a different investment landscape. A broad bush regional research article might be less useful than a more specific country focused article and several papers have already been published on the Japanese and Chinese markets. On the contrary, little is understood about India and our clients have been asking questions about India since late 2018. Since the regulations have improved, and India launched its first REIT in March of this year, it is being regarded as an emerging economy that is taking steps in the right direction for attracting foreign investment. Our clients have already begun investing in India and they would prefer little to be said about their activity, after all the less is understood about a region or type of trade, the less competition, and in theory this should keep prices low. For this reason, I have protected our interviewees identities, but hopefully I can provide the information needed to prompt an internal discussion about investments in India.
“Despite, concerns about the current economic concerns surrounding India right now it is still considered an emerging economy that has a lot of scale and you are able to target high returns. Yes, the risks are higher, but investors have considered whether the risk is worth taking.”
In India real estate is driven by good education and a strong middle class. Both drivers are considered to be on an upswing which coincides with an uptake in office. This uptake in office is driven by corporates looking into south east Asia, in particular FinTech companies. India sits alongside the US as one of the top two growth areas for Real Estate FinTech’s. According to CBRE there has been 14,600 new start ups in the India over the last 3 years, and more than 1200 of them have received $22bn of PE funding.
According to PWC by 2025, over 60% of all construction activity is forecast to take place in Emerging Markets. In India, real estate has played a large part in driving economic growth. India tops housing completions with an annual average of over 11 million between 2012 and 2025. The supports one of our interviewee’s views that “if office takes off, other markets follow”.
Rather than take extracts from the reports from advisory firms, I thought it might be useful to hear what principal investors are saying. I have spoken to many real estate investment professionals in my time as a Real Estate Headhunter but very few are versed in the real estate nuisances of India. I have selected two investment professionals with two differing profiles. One interviewee is currently based in Mumbai and has spent the last 11 years investing in pan Asian real estate, our other interviewee has 10 years in pan European credit and direct real estate investment. However, our European investor is about to Head an Indian investment platform.
An interview with two heads of India at Mid-Market Private Equity Shops.
Both professionals have over 10 years’ experience within financial services and both have backgrounds in the Real Estate Investment space. One has 10 years in experience in Europe whilst the other has 10 years of experience specifically in Asia. Our European investment professional has been mapping out the Indian investment landscape for the last 15 months and concluded “The situation is worse than I thought, the opportunity is bigger than I imagined. Take current returns in Europe and add double digits, at least”.
So, India, what’s the catalyst for the move?
Europe: I’ve been talking about doing it for the last 2 years but 15 months ago things got more serious. Right now, India is where Europe was 10 years ago, we haven’t done a deal yet, but we know the opportunity is there and if we are going to do any deals there, we need to be on the ground. We already have a back office function out there, but we are going to have 3 investment professionals in Mumbai, we’ve hired one and we are looking for one more so if you know anyone…
India: India, being an emerging economy, it has a lot of scale, you can target higher returns, but the risks are higher, most of the investors have considered whether the risk is worth taking. In India, in real estate, real estate is driven by strong demographics, good education and a strong middle class that has been spending more. This is where demand comes from. Over the last decade all those drivers have been on an upswing which creates an environment that PE guys need to be present in. Middle class spending has increased warehousing and the presence of amazon and Walmart. Office is driven by more corporates looking at south Asia. If office takes off everything follows look at canary wharf.
Is there an interest in India from your investors?
Europe: We think the opportunity is there however, we are going to be very careful with any deals we do. Of course, we are careful with anything we invest in Europe, but we are being supper careful about India. Some of our investors will like our deals and some will be more sceptical.
India: The opportunity is there, when you see the likes of Blackstone you tend to see others follow. Blackstone are so big they create the market.
What have you been through to get this project underway?
Europe: 2 years of talking about it and many plane flights to and from India. At the start of the process about 15 months ago I was working 50/50 across India and Europe now I’m fully focussed on India. There is a lot going on and a lot of advisors, brokers etc, so you see a lot, but execution is nothing like Europe. There are lots of stakeholders and everything takes a long time. In terms of internally at AnaCap the money we raised for our credit opportunities fund 4 can be deployed in India. Of course, we are not going to go and deploy 200m in India the deals we have been looking at are real estate deals and the majority have been less than 10 million.
India: It was a top down call, we made promises in terms of exposures to our LPs. We don’t just provide exposure to India we are providing exposure for our investors to all of Asia. For us it depends on risk reward flavours, Australia, China, Japan, Singapore, Korea, they are all different. China is very competitive if I had to pick one place to open up shop in Asia id pick china however, IRR on real estate in India is easily 15-20%.
What will be the measure of your success of India?
Europe: We are approaching this with caution we are not going to deploy lots of money in India. If the deals, go well we may raise more money specifically for it or continue to deploy from the credit opportunities fund.
India: Frankly, the focus keeps changing depending on how each asset class is in its life cycle. I focused on Residential at first and a lot of debt deal. We tried to deploy debt as initial markets slowed down, we move to yielding assets like office. Office became expensive because people like CPPIB and Blackstone started buying office directly, so we moved to student housing warehousing, affordable housing and hospitality which has recently revived after a 7 year lull. I’ve even started looking at Funeral Homes. We like to go under the radar as long as we continue to do that and stay ahead of the competition, we will continue be successful.
Who is the competition?
Europe and India: Other than us Oaktree, Varde, York, Silverpoint, Blackstone, CPPIB, GIC, KKR, Cerberus, Partners Group, LoneStart and there are quite a few local players.
Have they been successful?
Europe: It looks like the hedge funds have found it difficult. I think Liquid investors are struggling whilst illiquid investors seem to do okay. We are illiquid investors and we think there is opportunity for us, but we need to be cautious.
India: The Developers in India are under a lot of distress, if you know a few of the bankers it can be useful. If developers continue to be under distress it will create a big NPL market and investors will do well here. The bankruptcy laws aren’t as stringent as Europe, but they have got better, and enforcements are easier. The lenders and developers are striving for alternatives.
What is the main difference between investing in India vs Investing Europe?
Europe: The legal environment, execution, the state of the country, laws, etc. I’m not there yet but I expect a lot of differences. Most of the deals we have been looking at our under $10m in size and they are direct asset purchases from struggling borrowers.
India: Being in a regional role you don’t sit directly with the IC (Investment Committee) and you don’t really see them as often as if you sat in Europe or the US. In sourcing terms, it’s a pretty mixed bag, you’ve got the bulge brackets, JP Morgan and Morgan Stanley, the advisors; CBRE and JLL, and a lot of boutique brokers. The network is massive, the advisors bring you into competitive processes you need relationships with all the shops and ideally direct relationships with the developers. I have 50 guys in my broker network I try to stay on top of them but a lot of the time they are sending you something you rejected from the advisors a few months ago.
How will this affect capital raising?
Europe: We haven’t seen much change, we have the discretion over our current capital to be able to deploy it into India. We are not going to deploy more than 10% of the fund here. If things go well, we might raise a managed account from the investors who like our India deals. We will see.
India: Not much change, I think we will continue to deploy out of the one fund. I don’t see the need to raise a specific fund for Asia after all the point is to provide our current LPs with diversification.
What returns are you expecting?
Europe: Well into the double digits.
India: 15-20% IRR in India. If I was going to pick a location to set up in Asia, I’d pick China.
How would you describe the recruitment market?
Europe: The guys are very technical, but you don’t get the real salesman or originators. We are looking for people, do you know anyone?
India: Is it easy to find people. Yes and No. It’s not difficult to find people who can build models. At the Senior level the key is in funds based offshore, we are a good example, its important to have people who understand local markets, at the same time have the people who think the way you think. Its important skillset to have, while you are looking at a deal in India, can you gauge the risk rewards versus other countries. You may struggle to find the talent. You are very likely to find local talent; Junior bankers are often on the wrong side of a senior colleague. However, financial services firms in India don’t have the best culture.