Indian Real Estate Fund Snubs Delhi and Mumbai to Beat Peers
Motilal Oswal Financial Services’ real estate fund is beating peers by eschewing the nation’s biggest and priciest markets.
(Bloomberg) -- Motilal Oswal Financial Services Ltd.’s real estate fund, one of India’s oldest, is beating peers by eschewing the nation’s biggest and priciest markets.
The homegrown fund, which has about $500 million of assets under management and focuses on retail investors and residential properties, has made more than 50 investments since 2015 and exited almost 30. It has reported a more than 20% annualized internal rate of return over the period.
“Twenty percent in this market is outstanding,” said Shobhit Agarwal, chief executive officer of property research firm Anarock Capital. “At the beginning of this decade there were close to 20 residential-focused funds, but at the end most of these are either staring at negative returns, have exited at a loss, or continue to extend the exit deadline, leaving only 5-7 active funds now.”
Real estate is the second-biggest source of bankruptcies in the nation with the world’s worst bad-loan ratio, a steep slump from the heady days of the previous decade when property prices would double every three years. Motilal Oswal kept mainly to cities where India’s technology boom created demand for inexpensive homes, said Sharad Mittal, chief executive officer of Motilal Oswal Real Estate.
“We looked at what will sell in India, houses between 4 million rupees to 8 million rupees,” Mittal said in an interview in Mumbai. “We remained light on the frothy Mumbai, Delhi markets.”
| Funds Launched by Motilal Oswal | Amount Raised | Investments | Exits |
|---|---|---|---|
| India Realty Excellence Fund (IREF) (2009) | 1.6 billion rupee equity fund | 7 | 7 |
| Portfolio Management Service/Debt book | 3.5 billion rupee | 7 | 6 |
| India Realty Excellence Fund II (IREF II) 2015 | 5 billion rupee mezzanine focused fund | 14 | 11 |
| IREF III 2017 | 10.3 billion rupee | 23 | 6 |
| IREF IV 2020 | 12 billion rupee (target) | 9 | - |
| TOTAL | 60 | 30 |
It wasn’t always so simple for Motilal Oswal. Its first fund, which invested in smaller Mumbai developers, gave only a “suboptimal return” of 10%, Mittal said. About seven housing-focused local funds launched between 2010-2015 have been unable to repay principal, according to a report by Moneycontrol.com. Aditya Birla Real Estate Fund liquidated operations last year -- three years after it was due to close -- with a negative 2.66% return.
Mittal joined Motilal Oswal in 2013 and changed its focus from equity to mezzanine debt -- hybrid securities subordinate to pure equity but senior to other debt -- which typically offer more generous returns than vanilla corporate bonds. This protected his fund when developers began to go bust, he said.
Motilal Oswal is now seeing an opportunity to provide funding for housing projects that are stuck due to India’s shadow banking crisis. It plans to launch a 10 billion rupee ($136 million) fund next quarter.
Piramal Enterprises, helmed by Indian tycoon Ajay Piramal, also plans to launch a fund that will invest in stalled realty projects.
“There is a complete credit liquidity freeze, but everything is not bad,” Mittal said. “There is an opportunity to step in, do that last mile of funding and get the project completed, which would lead to unlocking of capital for everyone involved.”
To contact the reporter on this story: Dhwani Pandya in Mumbai at dpandya11@bloomberg.net
To contact the editors responsible for this story: Jeanette Rodrigues at jrodrigues26@bloomberg.net, Anto Antony
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