In October, Xander Investment Management Pte Ltd, the real estate private equity arm of Xander Group signed its first significant commercial office deal in Hyderabad, to invest $350 million for the development and subsequent acquisition of Phoenix Group’s project.
In a phone interview, Singapore-based Rohan Sikri, senior partner, Xander Investment Management, talked about the ongoing crisis in non-banking financial companies (NBFC) and the funding crunch in real estate, its strategy and investment plans. Edited excerpts:
Will the NBFC crisis lead to a funding crunch in real estate?
The current situation is not a surprise. Over the last few years, discipline—both in deal underwriting and asset liability management—was sacrificed for quick growth by NBFCs. We are now seeing the repercussions. We have a situation where NBFC portfolios (long-duration assets) are funded with short-term (debt) capital that can be swiftly called back.
There are serious servicing issues, where most real estate lending has been to residential projects, where prices have not gone anywhere in the last five years and sales velocity has been abysmal. Price cuts for finished inventory to generate cash flow from the end-consumer is perhaps the only answer, apart from imminent foreclosures and workouts.
The funding crunch was always there. It is only evident to the market now and can potentially get worse in the short term. While some of the well-capitalized, well-managed NBFCs will continue, I am not sure if the entire need can be fulfilled. Private equity could potentially come back into the sector but for that to happen, land prices need to significantly correct to demonstrate real margin and commensurate risk/return metrics.
What options do builders have then?
If NBFCs clamp up, which is expected to happen for the most part, I don’t see too many other avenues at this juncture. NBFCs slowing down will have a rippling effect on funding of projects. The parcel may no longer be eligible to be passed! We are likely to see defaults and delays in repayments.
Asset takeovers and workouts are imminent, so the industry should be prepared. Price cuts for finished inventory seems inevitable, as it is imperative for the industry to bring back the end consumer. I don’t think there is a fault in demand, it’s just that product needs be at a “consumable" price. Creation of liquidity needs to be a priority.
In the current scenario, what is Xander’s strategy as an investor in India?
Xander continues to be focused on income-based investment themes (retail, office and credit), as we believe “income" has always been the biggest mitigator of risk. Virtuous Retail is focused on the creation of retail infrastructure and plays to India’s consumption story.
We continue to acquire, own and operate office assets, where the thesis is to use our operating expertise to grow income during the course of our investment. This could be via asset repositioning, restructuring or development.
Our credit business is executed via our NBFC, Xander Finance, where we will continue to grow in a disciplined fashion. We still believe the residential opportunity is best addressed via our credit platform.
What are Xander’s plans in the office segment?
This is one of our key focus areas and we are actively scouting for acquisitions to grow our portfolio. It fits well with our theme of income-based investing and we have built a portfolio of 10 million sq. ft in India which we would like to grow.
Our clear preference is to own assets 100%, which enables us to control the destiny of its life cycle and provide us the desired outcome. There are not too many players in the market with this “operations-intensive" approach, hence we believe competition is limited.
Any new areas or sectors that Xander plans to venture into?
We have been making investments in the logistics and warehousing sector opportunistically. But now, we plan to do it in a focused and programmatic manner. We are actively looking at acquisition opportunities in this space.