India to unlock $9bn for roads, power investing

Bloomberg

A decade-long wait by India’s cash-hungry real estate and infrastructure developers may finally be nearing an end. Birla Sun Life Asset Management Co. estimates that real estate and infrastructure trusts will raise as much as 600 billion rupees ($9 billion) this year as India rolls out the much-anticipated investment products mooted in 2007.
Sterlite Power Transmission Ltd. and IRB Infrastructure Developers Ltd. are racing to be the first to launch an infrastructure investment trust, people with knowledge of the matter said, after the regulator allowed domestic funds to put money into assets such as toll roads, airports and office blocks.
India is seeking to replicate the success of similar trusts in the US, Singapore and Australia, where investors have flocked to assets that offer higher yields as those on global bonds languished near record lows. A new funding source may be crucial to the success of Prime Minister Narendra Modi’s goal of developing adequate electricity and water supplies as well as transport and digital connectivity. The trusts promise to be a key source of capital for real-estate and infrastructure developers as property sales have stagnated and banks have pulled back amid soured loans on their books.
“There is a hunger for yield in India right now,” said Maneesh Dangi, Mumbai-based co-chief investment officer at Birla Sun Life Asset Management, which oversees 1.7 trillion rupees. Investors will be looking to redeploy assets in the next 12 to 18 months as up to 17 trillion rupees of fixed-rate bank deposits mature, he said, adding that mutual funds could become a large supplier of capital for REITs and InvITs.
The Securities and Exchange Board of India drafted norms for investment trusts in 2007 and finalized them in September 2014. The regulator and government have since eased rules as the market failed to take off. Last month, SEBI cleared a major roadblock by allowing domestic mutual funds to invest, though some details still need to be spelled out.

CLEARING HURDLES
The Sterlite Power and IRB Infrastructure InvIT offerings hinge on SEBI detailing how mutual fund investments will be categorized, said people familiar with the matter, asking not to be identified as the information is private. A lack of investing guidelines from the Insurance Regulatory and Development Authority is another hurdle, they said. India’s largest domestic institutional investor Life Insurance Corporation of India is regulated by IRDA.
SEBI is expected to issue clarifications to ensure the market’s viability this quarter, said one of the people. The IRDA will finalize rules for local insurance companies to invest in REITs and InvITs in its upcoming board meeting, said people with knowledge of the matter.
IRDA Chairman T.S. Vijayan and a SEBI spokesman didn’t immediately respond to e-mailed questions. Since the first US REIT was approved in the 1960s, the global industry has swelled to about $1.7 trillion, according to a 2016 REIT report from consulting firm EY. Growth has accelerated in recent years as investors flocked to the offerings, with the market capitalization of non-US REITs more than doubling since 2010, the report shows.
REITs should offer yields of about 8 percent, though much depends on asset quality and the manager, Anuj Puri, the country head for India at broker Jones Lang LaSalle Inc., said in an e-mail. InvIT yields will range from 9.5 percent to 11 percent, estimated Chintan Lakhani, associate director at India Ratings & Research Pvt. India’s benchmark 10-year sovereign bond yield has dropped 90 basis points in the past year to 6.92 percent on Thursday.
Falling yields have been an unexpected savior for the IRB InvIT, Vibhor Singhal, vice president of institutional equity research at PhillipCapital (India) Private Ltd., wrote last month. “We expect investors in InvIT would be primarily foreign institutional investors, who are looking for a long-term instrument that provides them a decent spread over government bond yields,” he wrote.
The need for alternative funding comes as bank loans to industry, including advances for development of infrastructure, contracted 4.3 percent in the year to Dec. 23 to about 26 trillion rupees, according to data from the Reserve Bank of India. Apart from IRB Infrastructure and Sterlite Power’s proposed offerings, SEBI has four applications for InvITs and one for a REIT from Embassy Office Park.
InvITs will probably take off faster than REITs in India because “in general, there is greater affinity to invest in infrastructure,” said S. Sriniwasan, the chief executive officer of Kotak Realty Fund, a private equity fund with $1.47 billion of capital commitments.
The IRB InvIT Fund is planning to raise about 50 billion rupees to 55 billion rupees through an initial public offer that will launch in the next couple of months, according to people with knowledge of the matter. The company will offer a return of at least 350 bps above the 10-year government yield, they said.
Sterlite Power’s India Grid Trust filed a draft offer document in December for an issue of up to 26.5 billion rupees. Company Chief Executive Officer Pratik Agarwal said in January that some of the money raised would go toward repaying debt taken on for the infrastructure assets under the trust, while some would return to sponsor company Sterlite Power.
The InvIT “will allow global capital to come into a safe instrument and enjoy safe stable returns from those assets,” he said. “Given the current rate environment, this is exactly what the world needs.”