Reliance forms a real estate JV with Vornado for $500 mn fund ; PEs buy in as realtors face cash crunch

A downturn in demand for housing and the shortage of debt and investor capital in the real estate business may be bad news for realtors. But, it comes as a huge investment opportunity for private equity (PE) players. Such firms say it is a good time for them to strike deals with developers facing a cash crunch for completing their projects and fund expansion. “India is a land of scarcity and due to the downturn, more opportunistic distress investments will be made now,” says Aashish Kalra, co-founder and managing director, Trikona Capital, a real estate fund management firm. PE firms have invested around $5.8 billion in real estate cos in the first half of 2008. Real estate firms have seen a blip this year as high inflation, put at 12.1% by latest government estimates, a 13-year high, and rising interest rates as well as steep property prices have turned away buyers.

In the first six months of this year, PE firms invested around $5.8 billion or Rs24,360 crore across 56 real estate companies or special purpose vehicles (SPVs) built around projects, compared with $4.5 billion in 48 companies or SPVs in the year-ago period, according to Venture Intelligence, a firm that tracks venture capital and PE activity in India. Some of the prominent deals this year include: Standard Chartered Plc.’s $830 million investment in DLF Assets Ltd, a firm owned by the promoters of DLF Ltd, and steel tycoon L.N. Mittal and San Francisco-based Farallon Capital’s investment of $399 million in Indiabulls Real Estate Ltd.

In another interesting development in the realty space, Reliance Industries has entered into a joint venture with New York-based Vornado Realty Trust, a real estate investment firm. Under the equal JV, each partner will commit up to $250 million to acquire, develop and operate retail shopping centers across key cities in India. The shopping centers will contain 500,000 to 1,000,000 or more sq ft and typically be anchored by a hypermarket to be owned and operated by Reliance. Reliance currently operates over 700 retail stores in multiple formats in India.

Reliance was searching for a real estate manager for developing an asset base and had initiated talks with several international players, including US-based Taubman Centre and NYSE-listed Real Estate Investment Trust (REIT).

RIL has been aggressively scouting for joint ventures since in retail it has decided on the partnership model for growth. It has already signed JVs with Marks & Spencer, Vision Express, Miss Sixty and Office Depot. Reliance was also reported to be in talks with the Canada-based Four Seasons Hotels and French group Accor to set up hotels at some of its properties in Mumbai and Ahmedabad.

Vornado, the $14-billion market capitalisation company, develops and manages retail properties and office spaces in Washington and New York. Vornado has been quite active in India. It has a 50 per cent stake in the 263 acre IT Park in Gurgaon being developed by Uppal Group. The total investment in the project is expected to be Rs 5,000 crore and Vonado is jointly financing the project. It has also signed an MoU with the Maharashtra Government to develop a $200 million IT township. Vornado also has a partnership in India Property Fund, which is a $600 million fund it runs in association with The Chatterjee Group and invests in office and mixed-use development throughout India.