For someone who is incurably bullish on Indian real estate, Aashish Kalra, managing director of Trikona Capital, an India-focused real estate fund based out of New York, gets really worked up when professional ethics are mentioned. “The inability of Indian advisers to understand professionalism leaves me wondering,” he says. His parameters for picking partners are pretty stringent too: “We only work with developers who have integrity, a desire to be institutionalized, and an ability to execute and that rules out 99.9% of Indian developers.”
Trikona’s deals include a slew of slum development projects in Mumbai, a $1 billion (Rs4,040 crore) infrastructure development fund with IL&FS Ltd where it has a 10% stake, a 1% stake in Fortis Healthcare Ltd, a township development project with Sea King Infrastructure Ltd (SKIL), plus a clutch of commercial and retail developments. With initial investments of $500 million and commitments worth $1 billion in the pipeline, Trikona and Kalra have much riding on Indian real estate. Edited excerpts from an interview:
Where do you see the Indian real estate market going, with respect to private equity investments?
Let’s talk about where the market is today. It’s a very immature market. There is no denying that you have lots of opportunities. There is actually a lot of infrastructure—I am not talking about roads, ports and airports, I am talking about financial institutions, public markets and banks. Real estate, unfortunately, is not one of those sectors.
Big plans: Trikona’s Kalra
And that is what hampers it. The other things that hamper it are the structural issues imposed by the government—the Urban Land Ceiling Act or the Rent Control Act in Delhi. If you are talking about the pricing being high, it is because of lack of supply. If you increase the FSI (floor space index) across Delhi, prices will come down. There is no reason why 90% of Delhi needs to be under two storeys. Another example: There is land speculation in India, but there is almost no built-up product. You hear a lot about asset price bubbles. We need to learn to differentiate between the two (land speculation and asset price bubbles). To have an asset price bubble, you need an asset; but you don’t.
Isn’t the Reserve Bank of India trying to curb exactly that kind of speculation?
You don’t end speculation by cutting off all credit to an industry that is just about to become professional. You know what you just did? You just reduced supply, so prices will go higher.
That there is land speculation, there is no doubt. So tax it. If people don’t build within a specific time frame, tax them or put penalties or take away funding; link it to construction. There is no construction activity—you have less than 60-70 million sq. ft of office space in this country; there is a shortfall of 20-50 million new homes.Fulfilling these demands requires more money than the GDP (gross domestic product) of India. Are there any lessons to be learnt from America’s subprime mortgage crisis? Yes, but let’s first get there! The US got into the subprime crisis after they had a debt of $5 trillion and they had homes for pretty much everyone. First, let’s create a robust market that works all the way to a mortgage market... The great news is there is an unlimited demand in pretty much any sector that you look at. You have an inefficient market and you make a lot more money than you should.
Why do you call it an inefficient market? And I have never heard anyone complaining about thereturns!
It is inefficient because pricing is out of whack. There are unnatural barriers to entry everywhere. How do you find a deal, how do you work with a local developer? We have to deal with these issues every day. I am probably the only private equity investor who says that the returns are way too high. We make a lot more money in India than we should. We need to learn to appreciate risk-adjusted returns. Everyone here speaks in terms of absolute returns. Making 25% returns with less than 30% debt is very different from making 25% return with 80% debt and 10% mezzanine (finance). Across projects, we are making 20-30% (returns), but all the profits we are making with less than 20-30% debt.
I agree that the rising institutional investments will lead to more transparency, but how will the real estate index help? It is only around 4% of the entire market currently.
Much better than being 0%! If you are a large enough part of the index, the market starts viewing you differently. People like Godrej (Godrej Properties Ltd of Adi Godrej Group) entering the business and going public will create a perception change that will permeate all levels of the Indian political and bureaucratic environment. Without that, the developers and the few other people who are in the business are going to make far more money than they deserve. The people who will lose out are the ordinary citizens.
There is a perception that private equity investors in Indian real estate also indulge in speculation.
Speculation globally is a local activity. Institutional investors are in the business of providing people access to a class of assets that are collateralized and provide returns. We understand only cash flows.
Let us look at the business of Trikona. Our business is to provide global investors access to India’s growth rate through investments in real estate and infrastructure, and the cash flows that come it. But as there are no assets to buy, we have to be in the development game. All that it means is that I am taking a higher risk and I want a higher return. Since there was no ecosystem where we could invest, we created one—we partnered with SKIL, we partnered with IL&FS and we partnered with Fortis Healthcare. It gives us access to further real estate projects, be it alongside highways, ports or a railway line. Last year, $2 billion came into Indian real estate as total investment. The last building that sold in New York was worth more than that. I can’t understand what the noise is all about. We have created a monster where none exists. We are stifling an industry that doesn’t even exist. I don’t want to own 20-30% of a market that is growing at 5%. I would rather own 5% of a market that is growing at 40% a year. I want to invest a billion dollars every year, year-on-year, in equity. If it doesn’t become institutional, I will not have the scale.
Does that mean Trikona has been going slow on its investments?
No. We have done much better than what we expected last year. Our business plan calls for creating seven verticals across which we would invest. We were expecting to create three of them and invest around $300 million. We have actually created six of them and have invested $500 million. These verticals are infrastructure, where we have a 10% partnership with IL&FS that is worth $100 million, our partnership with SKIL, and our interest in Fortis Healthcare, which we plan to scale up to $1 billion.
Then there are residential townships—we are building 15 million homes or flats. We want to scale it up to 100 million. We have six partnerships across the country and we want to grow them.
In commercial (real estate), we are doing 30 million (sq. ft) across the country with different partners. In hospitality, we have 25 hotels in our portfolio today. Fifteen are under construction, two are already operating, including a five-star property in Mumbai.
Then we have urban rejuvenation (slum redevelopment). We are doing 25 million sq. ft of development mostly in Mumbai, with Dynamic Balwa and Lokhandwala (Developers). Then we have retail where we have around 5 million sq. ft coming up, with Dynamic. We have bought into Phoenix Mills. Lastly, we have logistics and industrials. We have 50-plus people on the ground, we have the partnerships that we need and we have made our initial investments. We are in a position to invest $2-3 billion in the next year or two.