Ishaan Real Estate PLC, which starts its roadshow today, is essentially a listed fund with an initial portfolio of eight property assets that will be majority owned and developed by K Raheja Corp, one of IndiaÆs leading real estate developers. K Raheja Corp, which will also be a shareholder in the listing vehicle, is run by the Raheja family which has been active in the countryÆs real estate market for several decades. The hope is to raise about ú180 million ($340 million).
According to people familiar with the offering, the unusual investment vehicle has already attracted good interest among Asian investors during the pre-marketing phase, with a couple of investors in Hong Kong and Singapore having signaled a commitment to buy about 10% of the available units.
What makes the fund attractive, they say, is the fact that it is run by an experienced developer and that it offers exposure across a variety of geographies and sectors in India. The geographical diversification in particular will limit the negative impact in case of a downturn in any one region.
But perhaps just as important is that 70% of the planned proceeds will be used to buy 40% stakes in identified real estate projects for which all relevant development approvals are already in place. The remaining proceeds are to be invested over the next 12 to 18 months.
This makes the prospect of the company less risky than most other similar funds which typically raise cash against a ôblindpoolö of assets or assets that are at an earlier stage in the approval process.
The fact that the projects are ready to go means it is much more certain that the fund will achieve its targeted internal rate of return, which in this case is estimated at 20% net of fees during the initial life of the company which will be 10 years. If the fund isnÆt able to allocate money to specific approved projects early on in its life, it may be difficult to match that target given that the domestic Indian risk free bond rate is only about 8%.
However, with the assets in the portfolio being greenfield projects that will take at least three years to complete, the fund wonÆt be producing any income in the near-term. According to the listing document, the typical investment cycle for a project owned by the company is between three and seven years before final disposal. This makes it different from a Reit, which is sold on the basis of providing investors with a stable income from the property rentals.
ôThis is definitely something people will buy based on total returns û back-ended total returns,ö one source says of the Ishaan fund.
The fact that the company will trade on a stock market will make it easier to access and exit than if it had been run as an unlisted fund, however.
All the current and future assets in the company, which is incorporated in the Isle of Man, will be real estate development projects that are eligible for foreign direct investment. The focus will be on IT park developments and special economic zones in southern and western India, but it can also invest in other types of projects, including commercial, hospitality, retail and residential developments.
The eight identified projects are based in or around the cities of Hyderabad, Mumbai, Bangalore and Pune and have total asset value of ú445.5 million ($851 million), as estimated by independent valuers Cushman & Wakefield. They will have a planned built floor area of 15.3 million square feet.
Of the initial eight projects, three are in special economic zones and two are commercial mini-cities offering commercial, hospitality and retail buildings on one site. The other projects include shopping malls in Hyderabad and Pune, the Renaissance Mumbai Hotel and Convention Centre and Lakeside Chalet, which is a combined hotel and serviced apartment project in Mumbai, and a business park in Bangalore.
The combined development costs for the projects in the initial portfolio are budgeted to be approximately ú460 million.
According to a press statement, the targeted cities have been chosen for their economic potential, the demand for the development of new high quality real estate assets in these locations and the availability of suitable land. The growth potential for the real estate sector is quite obvious against current forecasts that the Indian economy will grow at between 6% and 8% per year in the next 10 years.
IshaanÆs offer, which is jointly arranged by Deutsche Bank and JPMorgan Cazenove, comes on the heels of a heavily oversubscribed IPO by Parsvnath Developers that closed last Friday. That deal, which was more than 61 times covered overall, is widely expected to be priced at the top end of the range for a total deal size of $222 million. Given IshaanÆs larger size, however, it will provide a true test of whether there actually is as much demand for Indian real estate among foreign investors as bankers believe.
Among the potential concerns for investors will have to be the fact that the company will only have minority stakes in the development projects and all decisions, including the amount of leverage to take on for each project and the timing of the disposal, will require the approval of K Raheja Corp.
The group also has a complicated corporate structure with the listing vehicle being a holding company for an intermediate Mauritian holding company that in turn will hold six Mauritian SPVs which will buy the minority interest in six Indian investment. Those six companies will be the owners of the eight projects in the initial portfolio. That kind of convoluted ownership structure is bound to make the decision-making process even more complex.
Terms of the offering have yet to be disclosed, but the company will sell 100% of its share capital, including a greenshoe option of up to 15% of the base offer.
The order books will close on November 21 and the fund is expected to start trading on LondonÆs Alternative Investment Market (AIM) on November 27.
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