Fourth Indian property fund AIMs for London

Dev Property seeks $624 million for investments into Indiabulls-led development projects.
For the fourth time in just two months, an Indian developer is on the road with a fund that will allow investors to participate in certain development projects it is undertaking. The concept has proved popular with investors during the subscription stage but, since listing, two of the three funds have seen their share prices decline.

This time it is Indiabulls Real Estate that is looking for investors for the Dev Property Development fund, which will invest in commercial and residential developments in major Indian cities and in Special Economic Zones (SEZ) that are suitable for foreign direct investments. The fund is seeking to raise up to ú316 million ($624 million) including the greenshoe and, like the three funds before it, will list on LondonÆs Alternative Investment Market (AIM).

Citigroup, Deutsche Bank and UBS are joint bookrunners for the offering.

At the time of listing the fund will hold minority stakes in three different projects û two IT projects in the heart of Mumbai and one separate SEZ project - and all the money raised from investors (apart from the greenshoe) will be used to fund these investments. This means that at least for the initial years, investors will know what they are investing in, which should make them more comfortable.

It isnÆt uncommon that only a portion of the money raised by these types of funds will go to clearly identified projects, while the rest will be invested in the 12 to 18 months after listing. Aside from raising the risk profile of the fund, such an approach may also make it more difficult for the fund to reach its targeted internal rate of return since part of the money may end up being idle for some time.

By comparison, Dev Property is targeting an IRR of about 35% for the three initial projects, which have been valued at $225 million and are expected to be completed over the next three to four years. For subsequent projects, which have yet to be identified, the expected IRR will be lower at about 25% or in line with the returns targeted by a couple of the other Indian development funds that came to market at the end of last year.

ôThe more of these funds that come out, the more appealing they have to be,ö says one observer with regard to the high IRR. But given that construction has already started on Dev PropertiesÆ two IT projects, which are scheduled to be completed in about two years, the company has ôsolid groundö for these return estimates, he adds.

The fund will hold a 26% stake in each of these IT projects û the Jupiter Mills Project and the Elphinstone Mills Project û and 15% of the SEZ project. The remainder will be owned by an Indiabulls consortium, which will also be responsible for the development. Indiabulls has said that it plans to continue to co-invest with the fund in other projects in the future.

Indiabulls Real Estate was set up in 2005 as part of Indiabulls Financial Services and since then has shown a solid track record in terms of winning competitive bids for landmark properties in both Mumbai and New Delhi. It became the first Indian developer to bring foreign direct investments into the Indian real estate sector after the rules were changed in March 2005 by setting up a joint venture with US investment firm Farallon Capital Management.

For investors pondering whether to buy the Dev Property fund as opposed to any of the other three funds that have listed so far, this is likely to be viewed as a positive.

Aside from the quality of the projects in the portfolio, ôpeople need to take a view on the management, its track record and its ability to deliver and win new projects, which the IndiabullsÆ management has,ö one source argues. The fact that all the money is going into projects that are already under way is also something that sets it apart from the other three, he adds.

According to the groupÆs website, Indiabulls is currently evaluating ômany large-scale projects worth several hundred million dollarsö.

The flip side of having a strong partner is the fact that the fund will hold minority stakes in the projects it invests in, meaning it will have no control over these projects. However, people close to the offering note that this is really no different to when a company is offering 25% of its capital to the public in an IPO.

Dev Property is looking to sell 275 million shares at a fixed price of ú1 apiece, plus a 15% greenshoe that may add another 41 million shares. The bookbuilding started yesterday and will close tomorrow (January 25) with the trading debut scheduled for January 31.

The listing comes just over two months after Ishaan Real Estate Plc. broke new ground by raising $340 million for the first fund made up of Indian development assets to list on AIM. That fund, which is backed by K Raheja Corp, one of IndiaÆs leading real estate developers, is the only one that is currently trading above issue price with a 2% gain to ú1.02 recorded as of yesterday. The offer was arranged by Deutsche Bank and JPMorgan Cazenove.

It was followed in December by Hirco Plc and Unitech Corporate Parks, which raised $750 million and $710 million respectively. Since the trading debuts both funds have watched their share prices decline, however, and as of yesterday Hirco had lost 18% to ú4.095 while Unitech was off 9.25% at ú0.9075.

Observers say Hirco, which is backed by real estate developer Niranjan Hiranandani, may have suffered because it asked investors to commit money to a ôblindpoolö of assets with no clearly identified investment targets. The listing was arranged by HSBC and Bear Stearns.

Unitech, which is backed by the Unitech group, was brought to market by Deutsche Bank and Morgan Stanley.
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