Executing a deal is hard in India, takes lot of time: Xander group founder

In a Q&A, Sid Yog talks of the PE fund's recent acquisitions and strategy going forward

Private equity fund Xander Group recently signed two large property deals in the country, one wherein it bought a special economic zone in Chennai for Rs 2,200 crore and in another it bought a mall in Chandigarh for Rs 700 crore. Sid Yog, founder of Xander, which has committed over $2.3 billion in the country, discusses recent acquisitions and strategy going forward with Raghavendra Kamath.

You have signed two deals in India. How do you look at the valuations? Have valuations gone up because of competition for rental assets?
We look at valuations deal by deal. Sometimes you see things in a deal others don't or vice versa. Obviously we would only acquire something if we see value going in and the potential for further value creation through asset or financial restructuring and/or asset management. However, relative value is also based on a risk versus return assessment. We have different platforms and strategies which are looking at different return thresholds basis the risk they are ready to take on. So we are able to play along the risk/return curve from core+ to opportunistic.

There are definitely more investors looking at these asset types and so there is the risk of overbidding in a competitive situation and pricing is definitely getting sharper. So you have to very disciplined. But executing a deal is difficult in India and takes considerable time. Often potential investors don't have the patience to follow through, or the resources on the ground to be able to spend the time required to get the deal done. Or they are unwilling to work with the seller or JV partners, to structure and/or clean up a transaction due to the cost/time that entails. That can be a sweet spot. As can be your reputation in a complex and opaque market - the value of your handshake or the efficacy of your word and ability to stand by it, even in a down cycle, can differentiate you. We have been in India 12 years through good and bad times. We were here when the floodgates were open. And we were here honouring our commitments when everyone fled the market. People remember that and hopefully it counts for something.

Will you look at floating REITs for your commercial assets under both your mall joint venture VRSA and Xander in India or abroad?
All potential structures that are value accretive are always under consideration. And a REIT in India or abroad is always an option to be considered. A lot depends on the state of the market, the arbitrage between public and private markets, the maturity of the portfolio etc.. I would also add that while there may be sometimes a "first mover advantage", there is also the saying "fools rush in, where angels fear to tread". So its important not to get too caught up in the hype, and evaluate all aspects very carefully. We are in no desperation to create liquidity beyond really working the asset to generate additional and increasing income, but if valuations are appropriate and the structures have been stress tested from a regulatory perspective, we will of course look at them.

How do you look at demand for offices and malls and movement in lease rents going forward?
You have to look at individual cities and within those cities at different office micro-markets to assess multiple factors like new supply coming on line, vacancy levels, vectors of growth, quality of location, availability of parking, quality of the built assets, market cycles etc. Real estate investing cannot just be a macro call. And India is not one market. Each major city is a market unto itself with its own market cycle. Obviously the overall state of the international and domestic economy affects demand for space and net absorption, which we believe should remain comparatively strong as the Indian economy seems to be finally preparing to enter a new cap-ex cycle. However credit offtake is still weak and the banking system still clogged with bad loans. So we are circumspect at the macro level. But definitely positively circumspect.

For retail, given the paucity of quality retail space, we expect well-built and well located and well operated retail centers to continue to command a premium. Given it takes five to seven years, deep equity pockets, and the appetite to take development risk in an emerging market, to build a new center of scale in India, I don't foresee the situation changing anytime soon. However, I don't think rentals can increase beyond a point as retailers are still playing catch up and they need to really create more depth and breadth, and consumers ability and desire to pay needs to increase, so that the entire eco system can move up in a virtuous cycle. Having said that, the top centers because they trade well and retailers make money will obviously see higher increases.

Are you in talks to buy new commercial properties both under Xander and VRSA?
We are always in talks to buy assets (and sell assets) and do good deals. That's our business.

What is your outlook for residential properties in India?
We have been active investors in the residential sector for the last 12 years and continue to look at this asset class. The nature of the deals is dictated by structures available to us under prevailing regulation and the state of the market. Pure equity has given way to structured equity through our opportunistic funds and secured debt deals through our NBFC, Xander Finance which is very active today. However, we can safely say we are probably one of the biggest investors both in debt and in equity in residential right now. And happily so. The state of the market alone does not define the appetite to do deals or the returns you can generate. You buy low and sell high to make money. So when the markets are in a lull is the time to invest. But obviously if you can get similar returns in a structured debt deal sitting in a senior position, why would you take the equity risk? So each deal needs to be evaluated on its merit. And on the merit of the JV partner who is executing in the case of equity projects, and the quality of the credit of the borrower in the case of debt. Again there is no such thing as an Indian residential market. Residential markets are even more city and income segment driven.

What kind of money will you invest through VRSA and Xander in India in next two years?
Depends on what type of deals we see, the risk vs return trade-off, the comparative between India and other emerging markets, how the currency performs, the ability of the government to pursue its stated intent and agenda, the quality and approach of the state government (since land is a state subject) etc.. If one could answer all these questions, we could give you an exact dollar amount ! But we are here. We have been for twelve years since 2005 actively looking for value through market cycles.

Suffice to say, we are looking for retail opportunities for VRSA and beyond, for income generating office opportunities, for structured debt opportunities in real estate and non-real estate sectors, and for general opportunistic investments in warehousing, in mixed use projects, in hotels, in develop to core office, in distressed assets. Basically wherever we feel there is value to be had given the state of the market and the city the investment is in.