“We differentiate ourselves from the rest of the venture funds by capturing end-to-end value chain in real estate,” says Ved Prakash Arya, MD, Milestone Capital Advisors, a venture fund that invests in Indian real estate. With a background in retail and real estate, Arya, is only too familiar with the realty market and the regional differences. In a chat with Business Line, he discusses how investment options in real estate have widened and Milestone’s investment objectives.
Excerpts from the interview:
Why is the real estate story in India being suddenly discovered now?
About two to two-and-a-half years ago too, real estate investing was very much there. However, it was done by very few, that is, those with surplus cash or who have seen real estate investing in other countries. While there was interest, there were no avenues to invest.
Two years ago, the government allowed venture funds to invest in real estate. Now real estate mutual funds (REMFs) have been approved. With this the options available for investing in real estate have widened.
Further, one needed Rs 25-40 lakh to participate in real estate earlier. There was no opportunity for those with Rs 5-10 lakh. That has now changed.
What drove the prices in some pockets and to the steep corrections later?
The surge was uncalled for. Any hike has to be justified by the productivity of the land. But the land has not been productive. There is a herd mentality here. If one starts constructing IT buildings, everyone follows, without knowing the demand-supply status. This results in oversupply of assets of a similar kind in certain pockets. So the developer is under pressure from customers as a result of excess supply situation and is desperate, resulting in panic selling. If you look at Delhi, Gurgaon or Faridabad, this has been the case. Another aspect that led to the shoot up and later correction was the entry of speculative buyers rather than actual users.
For individuals who hold real estate with a longer perspective of, say, three years, there is no real threat. But if you hold with an idea of making money, like in the stock market, then real estate is a risky bet.
Milestone appears focussed more on Tier-II and III cities. Is the risk-return profile not higher in these areas?
We believe that India would continue to grow at 7-7.5 per cent. But this growth cannot come from the top four cities because the economic activity is no longer concentrated in these cities; it has expanded into the top 25 cities. So we are concentrating on these 25 cities besides the four metros. The amount of new activity/investments in these cities may not happen even in the top metros. Cities such as Mysore, Vizag or Mangalore will attract future investments. We believe India’s growth will come out of these cities and are, therefore, are taking a futuristic view.
Given the expected demand, we expect higher returns on our investments in Tier II and Tier III cities compared to Tier I.
You seem to be heavy on land holdings in cities such as Ahmedabad, Nagpur and Chennai? What are the advantages you see in these places?
Although Chennai is considered a metro, it is not really one. While it has lot of characteristics of a metro, prices have not gone up like the other metros. One can still afford a house or land. It has diversified industries such as auto and foundry. It has attracted a lot of investments from industries without much price increase so far. So believe Chennai is set to witness the next boom.
We also believe that Ahmedabad would be the next Mumbai with a stable government and plans to set up a financial city ($2 billion project). World-class infrastructure is being built there. Despite the proximity to Mumbai, the price in Ahmedabad is less than 20 per cent of that in the former. We see this going up.
Nagpur is in the heart of the country. When Boeing sets up their maintenance base for Asia there and MIHAN (Multimodal International Hub Airport at Nagpur) comes up, this city will see a change. It would be a city for logistics.
Your yield fund is like a REIT. Would this structure not earn more in other Asiatic countries than in India?
Yes they would. But people here do not have access to a Singapore REIT or Europe REIT. But if Indian assets find themselves listed in Singapore as a REIT, then the investors can get better returns. Here’s a typical example: If you would like to sell any property in India, then the offer price has to be such that the lowest yield (return generated by the property) would have to be, say, 10 per cent. Because in India you can earn 9-9.5 per cent by way of bank interest. So why would anybody want to buy below that? But in many overseas countries bank interest is 2.5-3.5 per cent. So people are only too happy to invest money where they would get 7.5 per cent.
How is Milestone different from the other realty funds?
There are various facets to real estate. On the supply side, there is agricultural and non-agricultural land. Residential property — here again for upper class, middle class, and so on. Then there is commercial — office and IT buildings and hotels, serviced apartments, warehouses, marriage and exhibition halls. That’s very vast.
Some real estate bring in money on development and others provide rental yield. Milestone is trying to capture an end-to-end value chain. We are trying to be present from the beginning — from agricultural land to rental properties. How are we different? There are no funds in India at present that cover the entire gamut.
Why is there low awareness about real estate funds among investors?
We do not target retail investors due to regulatory issues. We cannot take investors below Rs 5 lakh. Our Yield Fund started at Rs 10 lakh. Another scheme of ours offers entry at Rs 20 lakh. Yes, there is lack of awareness of real estate funds.
Those who want to begin investing in real estate prefer to invest in a property they actually see — something tangible. However, there are risks of land encroachment and hassles in registering a property. Realty funds offer hassle-free investing.
Similarly, there are others who prefer to put their money in shares of real estate. That amounts to investing in shares not in real estate. It is also fraught with equity risks. Investing in real estate funds instead offer professional services and a wider array of projects to invest within real estate. In that sense it is similar to mutual funds.
Excerpts from the interview:
Why is the real estate story in India being suddenly discovered now?
About two to two-and-a-half years ago too, real estate investing was very much there. However, it was done by very few, that is, those with surplus cash or who have seen real estate investing in other countries. While there was interest, there were no avenues to invest.
Two years ago, the government allowed venture funds to invest in real estate. Now real estate mutual funds (REMFs) have been approved. With this the options available for investing in real estate have widened.
Further, one needed Rs 25-40 lakh to participate in real estate earlier. There was no opportunity for those with Rs 5-10 lakh. That has now changed.
What drove the prices in some pockets and to the steep corrections later?
The surge was uncalled for. Any hike has to be justified by the productivity of the land. But the land has not been productive. There is a herd mentality here. If one starts constructing IT buildings, everyone follows, without knowing the demand-supply status. This results in oversupply of assets of a similar kind in certain pockets. So the developer is under pressure from customers as a result of excess supply situation and is desperate, resulting in panic selling. If you look at Delhi, Gurgaon or Faridabad, this has been the case. Another aspect that led to the shoot up and later correction was the entry of speculative buyers rather than actual users.
For individuals who hold real estate with a longer perspective of, say, three years, there is no real threat. But if you hold with an idea of making money, like in the stock market, then real estate is a risky bet.
Milestone appears focussed more on Tier-II and III cities. Is the risk-return profile not higher in these areas?
We believe that India would continue to grow at 7-7.5 per cent. But this growth cannot come from the top four cities because the economic activity is no longer concentrated in these cities; it has expanded into the top 25 cities. So we are concentrating on these 25 cities besides the four metros. The amount of new activity/investments in these cities may not happen even in the top metros. Cities such as Mysore, Vizag or Mangalore will attract future investments. We believe India’s growth will come out of these cities and are, therefore, are taking a futuristic view.
Given the expected demand, we expect higher returns on our investments in Tier II and Tier III cities compared to Tier I.
You seem to be heavy on land holdings in cities such as Ahmedabad, Nagpur and Chennai? What are the advantages you see in these places?
Although Chennai is considered a metro, it is not really one. While it has lot of characteristics of a metro, prices have not gone up like the other metros. One can still afford a house or land. It has diversified industries such as auto and foundry. It has attracted a lot of investments from industries without much price increase so far. So believe Chennai is set to witness the next boom.
We also believe that Ahmedabad would be the next Mumbai with a stable government and plans to set up a financial city ($2 billion project). World-class infrastructure is being built there. Despite the proximity to Mumbai, the price in Ahmedabad is less than 20 per cent of that in the former. We see this going up.
Nagpur is in the heart of the country. When Boeing sets up their maintenance base for Asia there and MIHAN (Multimodal International Hub Airport at Nagpur) comes up, this city will see a change. It would be a city for logistics.
Your yield fund is like a REIT. Would this structure not earn more in other Asiatic countries than in India?
Yes they would. But people here do not have access to a Singapore REIT or Europe REIT. But if Indian assets find themselves listed in Singapore as a REIT, then the investors can get better returns. Here’s a typical example: If you would like to sell any property in India, then the offer price has to be such that the lowest yield (return generated by the property) would have to be, say, 10 per cent. Because in India you can earn 9-9.5 per cent by way of bank interest. So why would anybody want to buy below that? But in many overseas countries bank interest is 2.5-3.5 per cent. So people are only too happy to invest money where they would get 7.5 per cent.
How is Milestone different from the other realty funds?
There are various facets to real estate. On the supply side, there is agricultural and non-agricultural land. Residential property — here again for upper class, middle class, and so on. Then there is commercial — office and IT buildings and hotels, serviced apartments, warehouses, marriage and exhibition halls. That’s very vast.
Some real estate bring in money on development and others provide rental yield. Milestone is trying to capture an end-to-end value chain. We are trying to be present from the beginning — from agricultural land to rental properties. How are we different? There are no funds in India at present that cover the entire gamut.
Why is there low awareness about real estate funds among investors?
We do not target retail investors due to regulatory issues. We cannot take investors below Rs 5 lakh. Our Yield Fund started at Rs 10 lakh. Another scheme of ours offers entry at Rs 20 lakh. Yes, there is lack of awareness of real estate funds.
Those who want to begin investing in real estate prefer to invest in a property they actually see — something tangible. However, there are risks of land encroachment and hassles in registering a property. Realty funds offer hassle-free investing.
Similarly, there are others who prefer to put their money in shares of real estate. That amounts to investing in shares not in real estate. It is also fraught with equity risks. Investing in real estate funds instead offer professional services and a wider array of projects to invest within real estate. In that sense it is similar to mutual funds.
2 comments:
Thanks for the information provided. In realty funds provided will help the people for there hassle free investing in property.
The Sebi recent move to allow mutual fund firms to play in realty space has opened up a new avenue for individual investors.It was a month ago that Sebi had approved the inclusion of real estate and issued a set of guidelines. Prior to that, only high net worth individuals were allowed to invest in realty directly. Now with realty brought under the MF guidelines, it will be much more transparent and regulated. It will encourage middle category investors to participate in the realty growth story with minimum investment. The timing is quite opportune as the real estate sector is currently experiencing strong winds from sub-prime bruised western markets, general fund crunch and a lull in the Indian IPO market. Allowing retail participation in real estate mutual funds (REMFs) will enhance liquidity and create a healthy secondary market for realty assets, observe industry analysts. The success of REMFs to a great extent would depend on how well the sponsors and fund managers voluntarily embrace the guidelines required for a successful introduction and sustenance of this kind of investment product.For more view- realtydigest.blogspot.com
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