A $580-mn fund executive sees an opportunity in India's real estate turmoil

Indiabulls Group has shifted its focus to office buildings after demand for homes waned. Investor confidence in realty was rocked last year by a series of missed payments by IL&FS Group companies

The turmoil in India’s residential property market and the cash squeeze faced by developers after a large non-bank finance company went belly up has created opportunities for Indiabulls Group’s real estate fund.

The fund, which manages $580 million, has shifted its focus to office buildings after demand for homes waned. Sluggish residential sales at a time when developers are struggling to pare debt and can’t complete projects has forced many to start to offload commercial assets, according to Ambar Maheshwari, the chief executive officer of private equity funds at Indiabulls Asset Management Co.

Investor confidence was rocked last year by a series of missed payments by Infrastructure Leasing & Financial Services Ltd That exacerbated the problem for developers, which have to repay about Rs 1.29 trillion ($18.7 billion) a year on their outstanding debts but which generate less than half of that in income that can be used for such purposes, an analysis of about 11,000 companies by research firm Liases Foras shows.

“I’m getting some fantastic deals in the market because of the crisis,” Maheshwari said in an interview in Mumbai. “Residential demand has dried up so cash flows have become a huge challenge. Leasing picked up substantially so commercial is better than ever, while residential became worse than ever.”

Indiabulls Asset’s private equity arm is buying pre-leased commercial buildings at a yield of between 8.5 and 9 percent, and plans to hold those assets for five years. The typical ticket size is between 2 and 4 billion rupees, he said.

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It partnered with InterGlobe Real Estate Ventures Pvt last year to buy a commercial tower in Gurugram near New Delhi for about 2 billion rupees from Hines India Real Estate Pvt. Maheshwari said he’s looking to close another transaction by month end, without elaborating.

“India is a small market, so it’s a flavor of the day market,” Maheshwari said. “In 2014, it was the time to do residential debt deals, which gave us returns of around 20 percent, then the market changed, returns became lower so we did hybrids with 15 percent debt and an equity kicker, which got us returns of about 21 to 22 percent. Now it’s the commercial deals that are in flavor.”

Other highlights from the interview:

• Indiabulls Asset is planning to raise a 5 billion rupee affordable housing fund that will invest in homes costing between Rs 5 million and Rs 7.5 million
• Stress in the residential market will remain for the foreseeable future, especially in the luxury segment where demand has dried up
• Affordable homes will continue to do well because the ticket sizes are smaller and the houses are for end-use as opposed to investment purposes