KKR swoops in as distress in India’s property market worsens

MUMBAI / Bloomberg

A rusty six-story steel structure surrounded by tin-sheet huts stands on a prime plot overlooking one of Mumbai’s largest open spaces of greenery: The horse-racing track in the city’s plush Mahalaxmi area. What was to be a soaring luxury skyscraper from DB Realty Ltd. has been languishing for more than five years, with the developer’s website still claiming that the project will be launched soon.
It’s a familiar scene across India’s cities, where thousands of idle construction sites offer testament to byzantine approvals processes and debt-laden developers’ inability to finance projects to completion. It is also an opportunity too big to pass up for moneyed-up investors such as KKR & Co.
Such buyers are flocking to India, lured by the prospect of acquiring property at deep discounts from down-and-out developers. Private-equity investment in India’s real estate sector jumped to the highest since 2008 last year and may almost triple this year, to $8 billion, according to the local unit of property broker JLL.
“With so much debt on the balance sheet of developers, it provides a wonderful opportunity for large players over the next one to two years where distress will be available in the market,” said Mumbai-based Amit Bhagat, chief executive officer at ASK Property Advisors Pvt., which manages $500 million in real estate assets.
Developers’ cash flow from operations has not been sufficient to cover their finance costs since the fiscal year ended 2012, according to a Moody’s Investors Service report. The aggregate cash flow from operations for six developers tracked by Moody’s was at 3 billion rupees (about $44 million) in the fiscal year ended March 2015, dropping from 30 billion rupees in 2011, while total interest costs rose to 36 billion rupees from 29 billion rupees in 2011, the data showed.
The influx of money is reminiscent of a decade ago, when investors lured by India’s economic growth drove property prices to records. Private-equity investment in real estate peaked at $8 billion in 2007 before slumping, data from JLL India show.
Piramal Fund Management, part of the billionaire Piramal family, is among investors setting its sights on the market. The fund is distributing about 150 billion rupees to about 10 developers that are in a position to buy land from, or start developments together with, struggling competitors. Piramal plans to pre-sanction at least 10 billion rupees to each developer allowing them more flexibility in closing deals, Khushru Jijina, the managing director of Piramal Fund Management said in an interview.
Jijina expects yields of as much as 24 percent from buying equity in real estate projects. That’s because prices have fallen about 10 percent to 15 percent across the country over the past couple of years.
“The market timing is opportune to underwrite equity risk,” Jijina said in an interview. “The flood of money that came in 2006 was when pricing was at its peak. In 2016 prices have bottomed out.”

Projects Delayed
Project delays are endemic in India, where developments often get hung up for years by red tape. Some projects have been languishing for more than eight years, according to Liases Foras, a real estate research firm. Developers who have loaded up on debt to finance projects often have to stop building as a result.
DB Realty said changes in building rules has delayed the construction of its ‘Turf View’ project in South Mumbai.
The planned 320-meter tower will be designed by architect Adrian Smith, who has designed the world’s tallest towers including the Burj Khalifa in Dubai and the Kingdom Towers in Jeddah. The tower could yield 80 floors depending on the design, N.M. Gattu, chief financial officer at DB Realty said in an e-mailed response to queries.
The company has now received all necessary approvals and plans to launch the development “soon”, Gattu said.