IREO, a real estate-focussed fund, is not a private equity player in the classical sense. The fund is also a co-developer with about 80% of its portfolio consisting of its own projects. Having entered the Indian realty market in 2004 and invested $1.5 billion till date, it is still referred to as a "five-year-old startup" by Lalit Goyal, vice-chairman and managing director, IREO Management Private Ltd. The fund has $500 million to invest across various segments in realty such as education, hospitality and retail apart from port infrastructure.
Goyal, formerly the CEO of Wimco Exports, is particularly bullish about bring technology-driven concepts to India’s “chalk-and-talk” classrooms and, says, education fits in well with IREO’s portfolio of integrated realty development. In an interview with VCCircle, Lalit Goyal talks about demand pickup, investor appetite and IREO’s development agenda. Excerpts:-
Q. What is your assessment of the investment opportunities in real estate?
There are lots of opportunities but pricing (from an investors’ 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 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.
Q. Aren’t real estate developers looking to PE players for bailout in a distressed environment and 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.
Q. 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 a hold for six to seven months. Everyone was looking for a direction where the markets will go.
Q. 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%.
Q. 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 middle.
I don’t think the realty market will go down any further. The prices will move up though not steeply. The market will stabilise 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 stabilise as it will depend on the global markets.
Q. What will be your investment strategy for the next two quarters? Would you continue being on the sidelines?
We will adopt a cautious approach. We will not go for auctions or high-cost teams. Three years ago, investors were buying in auctions at inflated prices. One of the reasons why IREO is surviving today is because we did not do deals like that. When we invested money, we knew that there will be at least one or two cycles. And, we were prepared for that.
Q. 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 3-4 years more before we monetise. 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.
Q. 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. Our major joint ventures are with Panchshil Realty (a Pune-based developer) and Singapore-based Ascendas. Pedigree is what we look at before investing in a company.
Q. How are your realty projects coming along? How does the deal pipeline look like?
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 in Pune is nearly complete and leased out.
The deal pipeline looks healthy. We invest at the SPV 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 residential projects tend to be less risky.
Q. What is your view on investing in land banks?
I don’t mind if the location is good. Land is the stock for any real estate company. All big players are surviving because they have quality land banks. Developers should invest in land banks only if they have equity and never with leverage money. Leverage strategy is not sustainable if you are land banking. But, if you are developing (buying land today and developing tomorrow), then the returns are faster.
Q. Tell us more about your development strategy?
One, competition will be global in the near future. So, our benchmarks too have to be global since FDI is open for all. After three years, we may find that our neighbourhood is developed by an international company. Two, we look at specific Indian problems and try and resolve them. Three, we believe in creating trust/brand for IREO. If we are keen on a location and do not get a good deal from a developer, we go out ourselves to aggregate land and behave like a developer.
Q. 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 a big market and is still under fed. We have been studying this space for two years. Education fits well with our portfolio of integrated development. In hospitality, our focus will be on mid-market and budget 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.
