Merrill Lynch forms JV with DLF in India

The US bank announces its largest India real estate investment, paying $377 million for a 49% stake in seven DLF projects.
Merrill Lynch will pay Rs14.8 billion ($377 million) to acquire a 49% equity stake in seven projects being built by IndiaÆs largest real estate developer, DLF.

DLF will carve out the residential projects into a subsidiary. Merrill Lynch will acquire a 49% stake in the subsidiary via an offshore affiliate, which holds the rest of the bank's real estate investments in India. Merrill will also receive proportionate board representation in the subsidiary.

The price tag on Merrill's stake in the joint venture suggests that the seven projects have been valued at Rs30.2 billion. The bank was advised on the investment by DSP Merrill Lynch.

The projects are mid-income housing projects, of which three are in Chennai, two in Bangalore and one each in Kochi and Indore. ôThey are envisaged as self-contained mini townships in the growth corridors of each of these cities,ö says a specialist. All the projects will be completed within eight years although individual projects could come onstream as early as 36-42 months from now.

In a related, but separate transaction, DLF also announced it would sell a 49% equity stake in another middle-income housing project in Panchkula, Haryana, to Brahma Investments, for a consideration of Rs1.9 billion.

Real estate prices in India have been sharply rising over the last few years, leading to concerns in some quarters that an asset bubble could be forming. But, those who are investing, point to the growth rate of 8%-9% per annum which India is registering and the increasing demand for all types of property: residential, commercial, retail, hotels and mixed-use to name a few. The India Brand Equity Foundation estimates that by 2010, the information technology sector alone will need 150 million square feet of space across major cities, and further estimates that in the residential sector, there is a housing shortage of 19 million units across the country.

ôThe players who succeed will be those with strong brand equity, pricing power and execution experience,ö comments a source close to the Merrill deal, explaining why DLF is well placed to continue to ride the real estate boom.

DLF is credited with transforming Gurgaon from a suburb of Haryana, adjoining IndiaÆs capital city, Delhi, into a mini-township. The wisdom of the DLF founders in acquiring large tracts of land on what became the national highway connecting Delhi and Gurgaon is indisputable today when Gurgaon has grown into the outsourcing hub of the country.

DLFÆs critics used to question its ability to move beyond Gurgaon and participate in the boom across the rest of the country, but the real estate developer silenced them by acquiring land banks in Hyderabad, Pune, Kolkata and elsewhere. Indeed, the land which is now being carved out into the subsidiary in which ML is acquiring a stake, is also one of DLFÆs forays beyond Guragon.

ôAn experienced management team with experience in land acquisition and property development is part of what makes DLF a successful player and attractive partner," says a source.

Recently, real estate deals have been at the centre of private equity investing in India. In January 2007, Morgan Stanley invested $152 million for a 10% stake in Mumbai-focused real estate developer Oberoi Constructions. This was followed by a spate of deals from Middle Eastern investors including the Nakheel Group, Khaleej Finance and Investment, Kuwait Investment Company and Kuwait Finance House. Calpers recently invested in a real estate fund promoted by IL&FS. Investors don't seem deterred by the high prices, as the steady stream of money into the sector corroborates.

DLF's shared closed today at Rs948, up 1.2% in a market which traded sideways and closed marginally down.
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