Ireo Management Pvt. Ltd, a real estate focused fund, is not just a private equity (PE) player. It is also a co-developer with about 80% of its portfolio consisting of its own projects. The fund has $500 million (Rs2,435 crore) to invest across segments in realty such as education, hospitality and retail, apart from port infrastructure. However, it has preferred to take a cautious approach.
In an interview with VCCircle, Lalit Goyal, vice-chairman and managing director, Ireo Management, talks about demand pick-up and investor appetite in the real estate sector. Edited excerpts:
Standing apart: Ireo Management’s Goyal says the firm has the DNA of both a fund and a developer, differentiating it from a typical PE player. Rajkumar / Mint
What is your assessment of the investment opportunities in real estate?
There are lots of opportunities, but pricing (from an investor’s point of view) is still on the higher side. That is why, a lot of deals are not getting closed. We think there is more correction (yet) to happen before funds start putting in their money. For example, we are sitting on a capital of $500 million to allocate. And we have not invested in the last nine months.
Aren’t real estate developers looking towards PE players for a bailout in a distressed environment, with funds indulging in price shopping?
Our strategy is to either own 50% of the project or 100% of the equity. So when you talk about 100%, the deals are few. Everyone is doing price shopping, but real estate depends a lot on location, and the location that we want is still not investment-friendly.
What were you thinking when the realty market went down?
Naturally, our investors started feeling jittery on whether to invest in this market. There were no real answers. The whole board was on hold for six-seven months. Everyone was looking for a direction where the markets will go.
Do you see demand picking up now
Demand is definitely picking up in the residential sector and it will be better if the interest rates are lowered. Ideally, Indian mortgage interest should be a maximum of 7-8%.
What is your outlook for the future?
Basically, prices went up very sharply and fell down very sharply. I expect it to settle down somewhere in (the) middle. I don’t think the realty market will go down any further. The prices will move up, though not steeply.
The market will stabilize after going up by another 15-20%. It’s a good time to buy from an end-user’s perspective. The commercial markets will take time to stabilize as it will depend on the global markets.
What will be your investment strategy for the next two quarters?
We will adopt a cautious approach. We will not go for auctions or high-cost teams.
Have you exited any of your investments?
We have been investing in India for the last five years and have still not taken a single dollar out. It will take three-four years more before we monetize. At eight years, it is indeed a long-term investment.
The markets have to correct and we still have a lot of time with us. So we are not looking at a quick exit. We believe real estate is a long-term play.
What is your key differentiator?
We have the DNA of both a fund and a developer. That makes us different from a normal private equity fund. We are very cautious on pricing, location and our partners. Pedigree is what we look at before investing in a company.
How are your realty projects coming along?
We will be launching 100 million sq. ft this year. We have already constructed around 4-5 million sq. ft in our Pune project, which has already been launched. Our residential project is around 80% sold and the SEZ (special economic zone) in Pune is nearly complete and leased out.
The deal pipeline looks healthy. We invest at the SPV (special purpose vehicle) level and there are a few projects which are willing to dilute over 50%. Our investment mix is 75% in residential and the remaining in SEZs and commercial parks. We feel (that) residential projects tend to be less risky.
Which other sectors in realty are you bullish about?
We are looking at the hospitality sector and waiting for the education sector to open up. Education is a big market and is still underfed. We have been studying this space for two years. Education fits (in) well with our portfolio of integrated development.
In hospitality, our focus will be on mid-market and budget (hotels), but we can also look at selective luxury hotels. We already have two properties in our portfolio. And once the government allows multi-brand retailing, we will look at the retail space. We are open to the port sector from a long-term investment perspective.
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