ASK Real Estate Special Opportunities Fund - Portfolio I (ASK Realty Fund)

ASK Real Estate Special Opportunities Fund - Portfolio I (ASK Realty Fund) is a real-estate private equity fund floated by ASK Investment Holdings (of the ASK group which is into wealth management). This fund, which seeks to collect about Rs 500 crore, would predominantly invest in residential real-estate projects in the top seven cities in the country.
Objective

The fund, open only for resident Indians, aims at providing diversification across various regions and business segments within real-estate without the hassles of owning and maintaining such estate. It would seek to provide compounded annual returns of 25 per cent over the five-year tenure of the fund.

The realty fund has a minimum ticket size of Rs 25 lakh, with additional investment allowed in multiples of Rs 5 lakh. The fund has a drawdown period of 24 months; in other words it would gradually deploy funds in projects across this period. There is an entry load of 2 per cent for investments up to Rs 5 crore.

Some of the unique features of the fund include staggered collection of funds to ease the burden of investors and also avoid unnecessary holding of cash by the fund. The fund would collect 20 per cent on application and the remaining (over every quarter or half-year) amount over the next two years.

Further, even as the there is a lock-in period, the fund would provide a liquidity window at the end of three years to allow investors to cash-out 10 per cent of their capital contribution. This provides an opportunity for those investors looking at liquidity. The fund would not also make any reinvestments. In other words, once a project is complete, the fund would return the distributable surplus to investors (in the form of dividend or capital gains) and would not redeploy the same.

ASK Realty Fund has chosen Mumbai, Bangalore, Chennai, Pune, Delhi, Hyderabad and Kolkata (in that order) to deploy its funds. According to the management, the fund does not see much opportunity at the “land buying” stage as enough land has been aggregated by developers in the last two-three years.

The fund, therefore, sees opportunities at the development stage in those residential projects where the plan approvals are in place and the construction is about to start. Another key strategy of the fund is to enter projects at “asset level” rather than “holding company level”. That is, the fund would invest only in specific projects and not in a real-estate company.

This strategy, according to the fund, would provide easier exit opportunities, as such projects are self-liquidating once the units are sold; investing in a company would entail waiting for right exit opportunities such as exit at the time of an IPO.

The fund would not look at investments in special economic zones or townships as these tend to have longer gestation and would not suit the fund’s five-year tenure. As to its strategy of concentrating in residential projects only in the top cities, the management feels that 50 per cent of the top spends in infrastructure under the Jawaharlal Nehru National Urban Renewal Mission would be in these top seven cities.

Further, given the talent pool available in these cities, creation of jobs on an economic revival can be expected to be faster in these cities. The fund also prefers to invest in projects of developers in these cities, whose capabilities, quality of work and scale may be far superior to builders in smaller towns.

While 70 per cent of the funds would be deployed in residential projects of the nature mentioned above, the fund may also invest the remaining 30 per cent in completed fixed-income generating office space. The fund will not invest in commercial space that is under construction or not occupied.

This investment is expected to deliver more regular returns over the tenure of the fund. The fund may also explore more specific opportunities such as redevelopment projects by housing societies (such as those in Mumbai) or sale and leaseback of old buildings located in Central Business Districts, after some renovation is carried out. Such renovation may be done with a view to improve the working conditions/amenities in the building, thereby improving rental yields.

Drop in office space rentals

Office space rentals have dropped five to 20 per cent across cities in the first quarter of 2009 as compared to the last quarter.

Global real estate service provider CB Richard Ellis’ office space review report says this is due to sluggish demand and the tendency, especially by the financial and IT sectors, to postpone real estate initiatives.

NCR

Connaught Place saw enhanced levels of second-hand space with tenants relocating to cost-effective destinations. With more malls becoming operational in the Saket District Centre, basic infrastructure was stretched.

Supply released in the last quarter (about 0.22 million sq.ft) was not absorbed, leading to a vacancy of around 35 per cent. Gurgaon continued to be slow with the IT and financial sector facing the heat of the economic downturn.

Average rentals at Connaught Place for March were Rs 240 a sq.ft a month compared to Rs 280 a sq.ft in December.

Rentals at Nehru Place were Rs 180 a sqft against Rs 225 in December. IT space in Gurgaon averaged Rs 45 a sq.ft against December rentals of Rs 55, and at Noida it was Rs 38 a sq.ft, against Rs 40 a sq.ft in December.

The central business district of Nariman Point witnessed a significant correction in rentals over the last 6-9 months.

Mumbai

With additional secondary stock added, the vacancy level rose to 15 per cent.

Average office rentals were around Rs 350 a sq.ft in March as against Rs 400 seen in December.

The alternate business district of Bandra Kurla Complex and Kalina has a ready supply of about one million sq.ft of office space, with an additional 0.5 million sq.ft supply expected in the next quarter. Rentals were at Rs 300 a sq.ft, compared to Rs 350 in December.

The secondary business district comprising western and eastern suburbs saw a sharp correction. Andheri, Ville Parle and Jogeswari dropped to Rs 150 a sq.ft in March as against Rs 175 in December last.

Bangalore

Most transactions in the central business district of MG Road, Richmond Road and Residency Road were in the small- and mid-sized segments.

A spate of relocation activity is expected as reducing cost, particularly real estate related, drives a number of companies to identify cheaper real estate solutions.

Rentals at MG Road and Residency Road averaged Rs 75 a sq.ft a month in March as compared to Rs 85 in December. Those in Koramangala and Indira Nagar were Rs 50 against Rs 60 earlier. Rentals at Whitefield and Electronic City were down to Rs 25 per sq.ft compared to Rs 27 earlier.

Chennai

The central business district, which includes areas of Anna Salai, T Nagar, RK Salai, Alwarpet and Nungambakkam, saw a lower level of demand in the March quarter.

However, overall vacancy levels remained low at about 5-6 per cent.

Average rentals were down to Rs 70 a sq.ft in March as compared to Rs 76 in December 2008.

The suburban business district that includes Velachery, Perungudi and Mount Poonamallee Road saw an absorption of about 0.2 million sq.ft, compared to 0.75 million sq.ft a year ago. Rentals were around Rs 38 a sq.ft, while it was Rs 41 in December.

Vacancy levels at the micro market – Perungalathur, Sholinganallur, Siruseri, Ambattur and GST Road – were 18-20 per cent. Here, rentals were Rs 25 a sq.ft compared to Rs 29 in December.

Hyderabad

Leasing in the CBD micro markets of Begumpet, Somajiguda and Banjara Hills witnessed a slowdown in the quarter ending March 2009 and vacancy levels rose near 10 per cent. Rentals were lower at Rs 55 a sq.ft in March compared to Rs 60 in December.

The IT corridor of Hitec City Madhapur, Kondapur, and Gachibowli dipped to Rs 35 a sq.ft from Rs 40 a sq.ft.

Pune

Like the last quarter, the micro markets of MG Road, Kalyani Nagar, Koregaon Park and Bund Garden continued to see demand for smaller format office spaces.

Further, softening of prices is providing an opportunity to occupants of Grade-B premises to relocate to better spaces.

The peripheral business district – Hinjewadi, Kharadi, Hadapsar, Talawade and Kharadi – remained the choice for large IT office requirements.

Rentals at Shivaji Nagar, Bund Garden Road and Koregaon Park were Rs 70 a sq.ft in March compared to Rs 90 in December. At Hinjewadi, Kharadi and Hadapsar it was Rs 35 a sq.ft in March, compared to Rs 42 a sq.ft in December.

Kolkata

Demand in office space leasing market in the central business district of Chowringhee, BBD Bag, Park Street and Camac Street was extremely low, leading to high discounts on quoted prices. Rentals were at Rs 100 a sq.ft in March as compared to Rs 120 in December.

Available supply in the secondary micro market, including EM Bypass, Kasba-Gariahat and Sarat Bose Road, was vacant. Vacancy levels were around 30 per cent in Kasba.

The peripheral market of Salt Lake and Rajarhat has been hit with high inventory pile-up and low demand. Rentals were at Rs 45 a sq.ft in March as compared to Rs 55 a sq.ft in December.

Heera Constructions unveils 3 new projects in Thiruvananthapuram

Heera Constructions, one of the leading property developers here, has announced the launch of three premium apartment complexes in the city.

Dr A.R. Babu, Managing Director of Heera Constructions, said here on Tuesday that all the three projects were fully ‘vaastu’ compliant and would feature fully air-conditioned lobby, reticulated gas connection, biometric sensor entry, video door phones and superior finish.

One of the projects, Heera Goldenhills, overlooks the Kanakakunnu Palace and the zoo. Another project, Heera Highlife, is located near Belhaven Gardens, Kowdiar, and will feature a car-lift to help park the vehicles in the second floor. The third project, namely Heera Dreams, is located at Sreekariyam, which is about 5 km from Technopark and 7 km from the airport.

RBI cuts rates again!

The Reserve Bank of India (RBI) has cut the repo and reverse repo rate by 25 basis points each. The repo rate has been cut to 4.75 percent from the existing 5 per cent while the reverse repo has been cut to 3.25 per cent from the existing 3.5 per cent.

The CRR has been left untouched at 5 per cent in the annual policy review on Tuesday. The repo rate is the rate at which the central bank lends to banks while reverse repo is the rate at which it absorbs excess cash from the black money markets. The central bank last cut interest rates in early March.

Sobha Developers gets FIs’ nod to restructure debt

Real estate major Sobha Developers has received in-principle approval from most of the financial institutions for restructuring of its debt. Mr J.C. Sharma, Managing Director, Sobha Developers, said that the company is “through with most of the banks, mutual funds and institutional investors for restructuring of our debt.” “They have looked into our revised cash flows and accordingly agreed to give us time,” he added.

Mr S. Baaskaran, Chief Financial Officer, said that the company now has extended the payment date by 12-18 months, for debts that were scheduled to be paid in the next 12-24 months.

“The ones that were scheduled to be paid after two years have not been restructured,” he clarified. The average interest rate is about 13 per cent, he said.

The company, which is in the process of restructuring its Rs 1,900-crore debt, plans to raise about Rs 900 crore through preferential equity, SPV-level equity and also through sale of a part of its 3,000-acre land bank. “We are looking at various options before us, and things are progressing well,” said Mr Sharma.

Mr Baaskaran said that the company hoped to raise about Rs 300 crore through preferential allotment, about Rs 300 crore through SPV-level funding, and the rest through sale of land. Through these measures, the company hopes to bring down the current leverage of 1.65 to less than 1 by March 2010.

He said that the company is also “planning two SPVs currently for our large integrated township projects at Pune and Kochi”. The Rs 1,000-crore project at Pune would see a development of 5.5 million sq ft spread over 110 acres, while the one at Kochi would see 38 million sq ft development spread over 450 acres at Rs 5,000 crore.

The company also expects to have “very comfortable cash flows for 2009-10”, thanks to its efforts to prune unnecessary costs and manpower, said Mr Baaskaran. While the company has adopted 10 per cent cut in salaries, there are also plans to downsize staff, if the situation warrants. “Things will improve from the third quarter of the next financial year. Prices won’t go up, but we will see better volumes; and with better volumes, the cash flow would be better,” he said.

The company’s contractual business is paying off well now, with 40 per cent of its revenues coming from this vertical.

“We plan to do business worth Rs 350 crore from this vertical in 2009-10, which would be 25 per cent higher than 2008-09,” he said.

Brigade Group to take up new realty projects

Real estate developer Brigade Group is looking to launch new projects, including hospitality developments, in the next nine to 12 months. In all, the company hopes to develop 10 million sq. ft. at a total investment of Rs 1,500 crore, said Mr M.R. Jaishankar, Chairman and Managing Director, Brigade Group.

For this, the company hopes to raise about Rs 1,000 crore through private equity, debt or a combination of the two.

“We are evaluating options,” said Mr Anil Kumar, Chief Financial Officer, Brigade Group. It is also looking at the special purpose vehicle-level funding for projects, he added. Brigade Group has opened its Mercure Homestead Residences, which will be managed by the Accor Group.

The 126-residence apartment has seen an investment of Rs 90-100 crore, according to him. The rack rate for a studio apartment would be Rs 11,500 a night, but the special opening rate would be Rs 6,500 a night. The average room size is 750-800 sq. ft.

Mr Vineet Verma, Chief Executive Officer, Brigade Hospitality Services, the hospitality arm of Brigade Group, said the company’s five-star hotel project with the Sheraton Group would be operational by 2010.

There are also two more projects — Holiday Inn with the InterContinental Group at Devanahalli at an investment of Rs 125 crore, and another with the Sheraton Group in Mysore at Rs 175 crore (both excluding investment into land) — that would be opened in 2012.

Reverse mortgage a necessity

Banks should not be hasty in cutting down property valuations in the current downturn, according to Mr Arun Ramanathan, Finance Secretary, Government of India.

In the context of the reverse mortgage scheme that supports the financial needs of the elderly, he said banks need to be careful on valuations which are done once in five years. In the current economic situation re-evaluating property could be a setback, especially for the elderly. While India has the demographic advantage with nearly half its population below the age of 25 years, the number of people over 65 years equals the population of Canada. The “numbers are large and disquieting” and India needs social systems that support the aged.

Barriers to scheme

Reverse mortgage supports the elderly by allowing them to use their house property to raise a loan to meet their financial requirements. But social barriers and mindset prevent the scheme from taking off in a big way.

Addressing a seminar on consumer issues in housing and housing finance, he said the Government was looking at a number of guidelines and regulation for the housing sector, including an ombudsman. The National Housing Bank has drawn up the guidelines which are under consideration. Minimum benchmarks of service are also needed for builders and lenders, he said.

Mr S. Sridhar, Chairman and Managing Director, National Housing Bank, said that the bank was trying to develop a uniform standard for valuations. A committee, including the Indian Banks Association and the School of Architecture and Planning, New Delhi, are drawing up the norms. Valuations based on these standards would soon be essential for transacting with public sector banks.

The National Housing Bank as a regulator of housing finance companies is looking at various measures of consumer protection, which include creating a common forum of banks and housing finance companies which would eventually evolve into a self-regulatory organisation. Later this year, the first batch of independent mortgage counsellors would earn their diplomas in home loan counselling. These counsellors who would have gone through a curriculum framed by the NHB would advise potential home loan borrowers in making an informed decision on various schemes of home loans available in the market.

Public sector banks have cut down on home loan interest rates to sustain flow of credit and even housing finance companies that have a higher cost of funds have managed to pare home loans, he said.

Easing credit flow

Mr M. S. Sundararajan, Chairman and Managing Director, Indian Bank, said public sector banks have done their best to ease the flow of credit to home loan borrowers. Indian Bank has seen a 25 per cent growth in home loans in 2007-08 and expects to see 20-22 per cent in 2008-09. If there is a drop in disbursements it is only because customers are ‘sitting on the fence.’ The banks have eased and speeded up the process of home loan disbursement. Home loan off-take is more a function of service than interest rates.

Banks are now competing to disburse home loans and now offer value-added services such as insurance linked home loans and restructuring of home loans to support those hit by the downturn, he said.

Citigroup Property defers investments in Nitesh Estates

Citigroup Property Investors, part of Citigroup, has deferred almost 85 per cent of its $360-million investment into a key real estate developer in India, signifying its waning interest in realty projects because of the global economic crisis.

Citigroup will, however, go ahead with its financial commitment for the developer’s $125-million Ritz Carlton hotel project. The Ritz-Carlton is part of the world’s largest chain of hotels and resorts, Four Seasons, and Bangalore will be the first city in India to have the property.

“Citi had signed for $360 million, out of which the Ritz Carlton is $55 million… Citigroup Property Investors, our joint venture partner for the Ritz Carlton project, is going ahead with its commitment of over $55 million equity in this project. Citi has deferred the rest of the money due to the global crisis,” Mr Shetty said.

The real estate developer has on its board of directors, former SEBI chairman, Mr G.N. Bajpai, and former ONGC chairman, Mr Subir Raha, among others.
financial partner

The company is also on the lookout for a financial partner for its other prestigious project, a mixed-use development in Chennai, as “Citi’s $100 million is not on for this project due to the economic crisis in the US,” he added.

Mr Shetty said a financial closure on debt has also been completed with a consortium of four banks — State Bank of India, Punjab National Bank, Central Bank and Canara Bank — for a total of Rs 300 crore.

The Ritz Carlton project is on in full swing, he said. Construction of the property is progressing well “after initial hiccups with rock on site”, he added. In fact, according to Mr Shetty, the company has drawn down a sizable portion of the Citigroup’s $55 million funding in the last one month.

The mock-up rooms are ready, and “we will be opening the hotel in December 2010,” he said. When opened, the hotel will have 281 rooms, three restaurants and a spa, and high-end retail, he added.

In all, the company has about 20 joint venture projects, at a total value of Rs 2,500 crore.

Mr Shetty said that his company was also developing a large-sized corporate housing project for ITC Ltd, which will be delivered in April this year.

Besides, its high-end residential project — Nitesh Buckingham Gate, where condominiums are priced at over Rs 8 crore — on upscale Lavelle Road in Bangalore will be will be ready in 45 days.

For the 7.5-lakh-sq-ft retail project — Nitesh Mall — coming up at Indira Nagar, Bangalore, the company will have HDFC Property Fund as its partner at an SPV level, where the development would also include a 150-room serviced apartment to be operated by Marriott. The company is also building high-end villas in Goa, said Mr Shetty.