Experts say mixed use will be the future of buildings as retail is becoming more organised, and FDI in multi-brand retail may be allowed
As real estate in India goes vertical, developers are focusing in a big way on mixed-use development. Experts call it the need and future of real estate in the country with land being a scarce resource. Internationally, mixed use development has been quite popular for long.
Back home, Supertech has Supernova in Noida, a mixed-use development building, and is planning to come up with more. The first three floors will be commercial and thereafter residential. Multiplex major PVR has acquired space already. Talks are on with MNCs who are interested in buying space in office building right next. “We have sold 600 units of the total 1,500 residential units,” said R K Arora, CMD, Supertech.Amrapali Group is developing two such buildings in Indirapuram (Ghaziabad, UP), Manesar (Haryana) and Indore (Madhya Pradesh), which will cater to retail and residential both. “We have five per cent space for retail as residents do not want too much of chaos or noise, where they reside,” said Anil Kumar Sharma, CMD, Amarapali Group.
Similarly, in Mumbai, the Phoenix Mills is developing mixed use projects in Pune, Mumbai, Bangalore and Chennai, after the success of its High Street Phoenix project in South Mumbai.
In Lower Parel, Mumbai, Phoenix has a hotel on top of a mall. In Kurla, Mumbai, it has a mall on the lower floors and office on the top.
While these projects have malls, which will provide steady cashflows to the company, Phoenix Mills is selling offices to repay the debt in each of the project. Bangalore and Chennai projects also have residential components, which give additional cashflows to the company. However, the company has put its hotel plans in these projects on hold, given the slowdown in the market.
Hiranandani Developers is another group which is developing mixed use projects in Panvel near Mumbai and in Chennai. It has already developed two such projects in Powai in Mumbai and Thane in Maharashtra which have residential complexes, offices and a hotel.
NCR-based R G Group is looking at opportunities to build mixed used buildings. “Things are in pipeline right now. Mixed-use buildings are surely the future of the country,” said Aman Gupta, executive director, R G Group.
As retail is becoming more organised, and FDI in multi-brand retail may be allowed sometime soon, mixed use will be the future of buildings in India, say experts.
Mixed-use development is taking place primarily in large townships where office, retail, housing and commercial projects are coming up. It reduces the risk for the developers, explained Samir Jasuja, founder and chief executive officer at PropEquity. That is, if one segment is not doing well, the developer can focus on other segments. Once the whole township is developed, which can take 10-15 years, developers can command significant premium over sales and leases, Jasuja said. While investors can expect higher return, end users get the convenience, he added.
“Land will be a problem in the coming years, therefore mixed-use buildings and going vertical is the way out for efficient use of land”, said Saloni Nangia, president, Technopak. Technopak also noted that traffic problems can also ease out with such buildings, with shops being right below the residential buildings.
Consultants say mixed use projects are becoming popular due to easy financial closure and use perspective.
“These projects are becoming popular among multi-national corporate occupants as mixed use complexes will have food courts, night clubs, and serviced apartments. They think it is best tool for employee retention,” said Raja Kaushal, BNP Paribas Real Estate and Infrastructure Advisory.
However, R R Singh, director general National Real Estate Development Council, said in India we do not need mixed use development buildings as the culture is not balanced, unlike developed countries. “How can you accommodate lower income groups in these mixed-use buildings. They do not go to malls,” he asked. He said in India, we already have shops in the residential colonies for daily-use items and do not need separate buildings for the same.
Can private equity investors turn the tide in favour of real estate developers this time round?
Private equity (PE) investors, who had virtually shut the door for real estate players two years ago, are slowly walking back into the sector, amid prospects of lucrative returns and a minor drop in risk perception, especially in residential projects. As usual, PE investors are overtly cautious and investments in the sector are happening at a rather slow pace. A slew of PE deals that were concluded in last couple of months have turned out to be a big confidence booster for the sector.
Apart from PE funds, some real estate-dedicated funds are also active in the market, scouting for deals. In the last six months, projects with reputed developers and with lesser risk have been able to attract investments from these investors, say industry experts. While the first round of real estate-dedicated funds matures, a small breed of PE funds is also attempting to go back to their investors for fresh subscription
Pirojsha Godrej, managing director of Godrej Properties, which recently sewed up a PE deal, is elated. “This fits in well with GPL’s strategy for efficient capital management,” says Godrej, adding that it is no longer difficult for the developers with good track record to attract investors. His company sold 49 per cent equity stake in its subsidiary, Godrej Premium Builders Private Limited (GPBPL) to SUN-Apollo India Real Estate Fund. SUN-Apollo invested Rs 45 crore, out of which Rs18.3 crore has been paid to GPL for sale of stake while Rs 26.7 crore has been invested in GPBPL.
Mumbai-based Omkar Realtors & Developers is another player that has successfully signed a PE deal recently. According to Gaurav Gupta, director of Omkar Realtors & Developers, “Developers with a credible track record and sizeable land parcels are being targeted by investors.” Omkar is getting good response from the investors, he adds.
For instance, IndiaReit Funds Advisors has invested, through a structured deal, Rs 200 crore in Omkar Realtors & Developers mixed-use project at Worli in Mumbai. The deal ensures that the fund gets 100 per cent return in the next four years on completion of the project. “Investors’ confidence is high as Omkar has already delivered nine projects. Both these projects are to be launched in 2012,” claims Gupta.
According to the deal structure, the PE fund will also get 10 per cent incremental return and will control 30 per cent of the special purpose vehicle executing project until these returns are delivered. The developer had also raised Rs 250 crore through another PE transaction with Red Fort Capital, for its Malad project.
Anuj Nangpal, director (investment advisory) of DTZ India, points out tha private equity funds were not able to get the kind of returns from their earlier transactions. “Now they are cautious and investing in projects that carry lesser risk. The returns the private equity firms are expecting is also higher — around 25 per cent and in some cases even higher than that. Moreover, they are not willing to invest in purchasing of land or in pre-approved projects like they did earlier. The investment is happening in the under-construction projects with lesser risk,” says Nangpal.
For some developers, the situation is more desperate as they are trying to bring down debt through sale of properties to investors. Recently, DLF along with its joint venture partner Hubtown sold 100 per cent of their respective shareholding in DLF Ackruti Info Parks (Pune) for around Rs 810 crore to an entity controlled by real estate fund affiliated with the Blackstone Group, BRE/Mauritius Investments II. DLF plans to use the entire cash flow to retire debt. “The entire value received from the sale will go for debt reduction. Till 2013, we are planning to cut debt worth Rs 6,000 crore. We are looking at monetising our non-core assets for the same. Aman Resorts is on the block for the next quarter,” says Rajeev Talwar, executive director of DLF.
According to Nangpal more such PE transactions are likely to take place as many cash-strapped developers are desperate to restructure debt. “Developers get more flexible payment options and longer tenure with private equity players. For this they are willing to pay high interest rates and borrow from PE investors,” says Nangpal.
Shobhit Agarwal, joint managing director (capital markets) of Jones Lang LaSalle, is however bullish about PE investments. “As of now, PE investment remains flat compared to last year but going forward, it is expected to gain momentum. To tap this opportunity, different asset managers are seeking to raise money through new real estate PE funds that will be floated.”
According to Agarwal, around 12 different asset managers are seeking to raise money via new real estate PE funds to be floated. These funds are expected to invest around $2-2.5 billion in real estate projects in India, says Agarwal.
Another private equity fund, Red Fort Capital, is also in the process of raising around Rs 1,500 crore real estate-dedicated fund in 2012. According to a senior official from Red Fort Capital, they are in the final stages of closing the deal.
However, unlike before, many funds are raising money for investment in structured instruments that resemble debt rather than equity: Desperate developers offer as much as 36 per cent per annum yield on investments.
Kotak Realty Fund recently raised a yield fund of Rs 523 crore entirely from domestic investors. “Given the demand potential, residential projects would be the primary focus of investment followed by commercial properties,” states a Kotak Realty Fund release.
“In a challenging fund-raising environment, we are gratified to see the confidence that both existing and new investors have placed in our funds. This is based on our strong track record,” says Vikas Chimakurthy, director of Kotak Realty Fund.
In another instance, Peninsula Land and Brookfield AMC have announced a joint venture to launch a real estate fund shortly, which will raise money from domestic investors.
On the flip side, several private equity funds are also expected to exit in 2012. “Most private equity real estate fund managers have either hit the exit phase already or are readying themselves to exit investments to repay investors in their funds. In 2012, such funds are expected to sell assets worth around $2.5 billion,” says Anuj Puri, country head of Jones Lang LaSalle.
The real estate consultancy forecasts that realised returns for these funds will continue to be low given the negative market sentiment and weak economy. As a result, fresh investments by real estate PEs are expected to be under $1 billion in 2012, according to Puri.
“In 2010 and 2011, a total $3 billion of real estate private equity exits took place with an average return of only 1.2 times, much lower than expectations,” says Puri. “In the past two years, funds were under pressure to liquidate as their investment period was coming to an end. Also, the negative sentiment and uncertain economy and price correction of real estate projects have yielded low return,” says Puri.
Since many residential projects are nearing completion and will be on offer for sale, real estate funds will have a natural exit in 2012 as well. “The returns in these exits may be marginally better than those realised in the past two years,” adds Puri.
NEW DELHI: Welcoming the government’s decision to allow 100 per cent foreign direct investment in single-brand retail, India’s small and medium enterprises (SMEs) say the mandatory 30 percent sourcing from micro and small industries will help them achieve higher growth.
A Confederation of Indian Industry (CII) survey found that the SME industry, by and large, supported 100 per cent FDI in single-brand retail.
“The government’s decision of mandatory sourcing of a minimum of 30 per cent from Indian micro and small industry will help SMEs to achieve higher growth in sales, size of the industry, capacity addition, increased orders, qualitative improvements and branding of the products, technology upgradation, employment etc,” said the survey on the impact of FDI in retail on SMEs.
According to the survey, mandatory sourcing will provide for expansion of the scales of production facilitating domestic value addition in manufacturing, thereby creating a multiplier effect on employment, technology upgradation and income generation, demand and further investment.
The SMEs are also bullish about 51 per cent FDI in multi-brand retail and expect its earlier and speedier implementation would lead to the growth of organised retail.
“India’s growing retail boom is a success story. Fifty-one percent FDI in multi-brand retail and its early implementation would give a major boost to the all round growth of organized retail in the country having substantial positive impact on the growth of SMEs,” said Chandrajit Banerjee, director general, CII.
The CII survey was based on a large sample size covering different categories of SMEs according to sales turnover. This included companies with a turnover of Rs.25 lakh to Rs.1 crore, between Rs.1 crore to Rs.5 crore, Rs.5 crore to 25 crore and those having turnover between Rs.25 crore and 100 crore and above, from different regions of the country.
Asked how the SME industry considered the entry of MNC (multinational corporation) retailers, over 66 per cent of the respondents said it was an opportunity. Around 21 percent of them perceived it as a threat. About 12.5 per cent of respondents said the decision would have little or no impact on their businesses.
Over 98 per cent of the respondents said opening of the FDI in retail will augment growth of sales of their products. Of them, around 21 percent foresaw the growth of sales to escalate more than 20 per cent while 31 per cent expected the impact in the range of 10-20 percent.
Around 48 per cent of the respondents said the decision would have a positive impact whereas 35 per cent expected no change in the employment scenario.
India is exploring the possibility of the Abu Dhabi Investment Authority (ADIA), one of the world’s largest sovereign funds to set up a joint venture with an Indian infrastructure institution — IDFC or ILFS — to make big ticket investments in the infrastructure space where the government has plans to invest US $1 trillion over the next five years.
India is also exploring if ADIA can invest directly in the infrastructure sector through a wholly owned subsidiary. The other opportunity being explored is for ADIA to contribute to the DMIC project implementation fund by way of debt or equity which is being set up as a trust. This will ensure nullifying investment risks.
The Gulf countries are diversifying their investments in emerging countries like India and China following economic problems in Europe and the US. The Abu Dhabi team’s visit is part of a series of engagements where the Gulf countries are exploring investments in India.
ADIA has expressed keen interest in investing in India. ADIA managing director Sheikh Hamed bin Zayed al Nahyan met Commerce & Industry Minister Anand Sharma to discuss the opportunities of investment in India. Both sides agreed to finalize a joint working group to expedite the process. “This is an opportunity to enter this huge market,” al Nahyan said.
Sharma said India planned to invest $1 trillion in infrastructure over the next five years and huge opportunities existed, including along the Delhi Mumbai industrial corridor.
Keeping in mind the worsening investment climate in developed nations both sides agreed that UAE and India should engage more. Sharma underlined the need to diversify the investment portfolio and proposed that 3-4 new areas must be identified for closer interaction like pharma, services sector and engineering along with agro processing.
The United Arab Emirates is India’s leading trading partner in the entire West Asia & North Africa (WANA) region, accounting for about 63% of India’s total trade with GCC countries in 2010-11. Bilateral trade has jumped over threefold in the last five years. Total trade in 2010 touched $60.3 billion. Bilateral trade between January to November 2011 was at $66.5 billion.
The International Finance Corporation (IFC) has decided in principle to support affordable housing in the Rs 5-7 lakh range for the Indian lower-middle and less-affluent segments.
IFC, which has embarked on a major initiative in the housing finance sector in India for the first time, is looking at supporting mass housing and ‘truly affordable housing’. Dovetailed with this initiative will be efforts to keep the housing projects that it will support in line with appropriate green building initiatives — environment-friendly, energy, water and other resources-efficient structures.
It plans to work with multiple agencies, including the government bodies and private sector players. IFC is also keen on supporting the private sector house builder, who is capable of delivering value housing, It will bring in the expertise that it has built up internationally, particularly in economies in Latin America and South East Asia, where it has solved the problem of affordable housing, despite high GDP growth rates that are driving up the costs.
The investment arm of WB is working with the National Housing Bank on a report for addressing country’s need for affordable and environment-friendly housing.
IFC will also address the regulatory side by working with the authorities concerned on the mandatory minimum standards of efficiency. It has built up experience in Indonesia and other countries, and is keen on bringing similar initiatives to India and China.
While the IFC will work with agencies such as the Bureau of Energy Efficiency, its focus will be more on working at the ground level with state-level agencies. It is keen for ‘traction at the ground level’. State governments in Rajasthan, Gujarat and Tamil Nadu are moving in the right direction, and can benefit from support in developing knowledge in human resources among the authorities.
It is looking at a line of financing that lays emphasis on green housing. IFC is talking to some developers in major cities to explore opportunities for direct financing of projects.
The IFC is also partnering with the National Housing Bank to set up a mortgage guarantee company, IMGC. This will be a Public-Private Partnership between NHB, IFC, Asian Development Bank and an international mortgage insurance holding company, Genworth Financial International Holdings, a part of the US-based Genworth Financial, a financial services company.
IMGC will provide credit risk coverage to residential mortgage lenders, to protect them in case of borrower default. IFC will invest Rs 80 crore during the next five years, to take up to 19 per cent equity stake in the company, to be headquartered in NCR, Delhi. — S.C. Dhall
Some believe that retail market opening to FDI could spell opportunity to realty players; but some just want to wait and see which way the wind blows before they put in their money
Property developers in India are eagerly waiting for the government to open up the retail sector. The recent pullback after proposing to open up the sector for foreign giants, owing to stiff political opposition, has cast a pall over the country’s commercial property market. If the retail market is completely thrown open to foreign direct investment (FDI), it would, say experts, throw up an unprecedented opportunity for property developers in tier-II and tier-III cities in the country. Even then, Wednesday’s official notification of 100 per cent FDI in single brand retail will open up the market.
“This can prove to be a game-changer,” says Pankaj Renjhen, managing director (retail services) of Jones Lang LaSalle India.
But will it lead to a boom in mall construction? Will it help property developers? Will the global retail giants go for a traditional revenue sharing model?
Vinod Rohera, director of K Raheja Corp, which set up Inorbit mall, believes that the pick-up in demand will be selective. “If FDI is allowed in the country, not necessarily all malls will witness demand. Only if the mall is up to mark in terms of logistics, will international brands opt for them. Malls that are weak fundamentally will not witness any demand,” he says.
On the supply side, Rohera said it would be extremely difficult for real estate developers to buy land at reasonable rates at prime locations. “Given the high cost of land acquisition and construction costs, supply won’t increase overnight. Retailers will also find it difficult to make money as developers will try to pass on the high input costs to retailers. Thus one has to wait and see how things shape up,” says Rohera
Lalit Kumar Jain, chairman and managing director of Kumar Urban Development, believes that the developers are unlikely to undertake mall construction if FDI is allowed in retail. “Big retailers like Carrefour or Wal-Mart will adopt a module where they or their Indian partners will construct the mall. There will be a few assets in good locations, which will be constructed by developers. There will be special purpose vehicles created by large mall operators with the retailers for construction of the mall,” says Jain. “It is too early to comment on the revenue sharing pattern,” says Jain.
The change in policy framework, as and when it happens, will definitely facilitate entry of large organised retailers into metro as well as big non-metro cities. It would have actually set in motion a chain reaction down the line, catalysing more demand from consumers, thereby, boosting demand for retail real estate development.
There is no doubt that these tier-II and tier-III cities and smaller towns in the districts remain by and large remain untapped. They hold huge potential for generating demand that international giants would find irresistible.
Though international retailers such as Wal-Mart and Metro are already operating in the country through the cash-and-carry model (aimed at wholesalers) including in smaller cities like Raipur and Ludhiana, the real picture will unfold with opening up of the retail market for them. Foreign retailers will seek to expand their businesses in metros and cities and gain the early-mover advantage. India will see a steady line-up of retailers in these cities over the next couple of years.
Most developers across the country feel that opening up of retail to FDI would do good to the real estate sector that is facing lots of hardships at present. Subir Das, COO of Avani Riverside Mall in Kolkata, told FC Build that opening up of FDI in retail would have given an impetus to retail real estate projects as the demand for such property would multiply. “Even existing retail properties would benefit from this. But now the much expected price growth for developer would be missed.”
According to Renjhen, international hypermarket chains such as Wal-Mart, Tesco and Carrefour, as well as national chains such as Big Bazaar and More will absorb the highest amount of retail real estate in tier-II and tier-III cities, as and when FDI in multi-brand retail in finally allowed. “Their first push will be into cities with population bases of one million or more. Though the spread will happen in all regions, there will not be any wholesale expansion, but growth will rather take place in clusters. The speed of the spread will be decided by how fast the required retail logistics and infrastructure can be put in.”
This would also have a cascading effect on residential property prices. A flourishing or an upcoming retail property gives fillip to the nearby residential property prices, which now looks unlikely. Also, opening up of FDI in retail would have initiated a new cycle of consumption because of creation of numerous job opportunities. “This job creation would have created a new demand for residential properties, primarily in the LIG (low income group) segment,” he said.
There is, however, difference of opinions on whether FDI in retail would significantly impact realty prices
Kumar Rajagopalan, CEO of Retailers Association of India, believes domestic retailers are capable of absorbing the properties being developed now. “When FDI opens up, there will be more demand for real estate. The slump in real estate prices is good for the retail industry. However, retail real estate is a small part of the real estate market, which is dominated by office and residential real estate. If demand for these remain subdued, retail demand itself will not push real estate up. FDI in retail will not dramatically impact real estate prices,” he said.
According to Mayank Saksena, managing director (country firm management) of Jones Lang LaSalle India, as and when FDI in retail is allowed, new players would come into play. “New players would mean new demand and new demand would necessitate more space. Paucity of space would push up prices.”
The positive impact of the FDI in retail may not be felt immediately in tier-II and tier-III cities. Initially, the development might be restricted to the metros. If everything goes right, it would take three to five years for the tier-II and tier-III cities for any benefit to trickle through, he clarifies. The growth, therefore, will happen in phases. This is because tier-II and tier-III cities are not at par in terms of demand and growth drivers, and there exists a great deal of variation in purchasing power and affluence levels of these markets.
Saksena explains why allowing FDI in retail would be (or would have been) good for the real estate sector. “The last economic recession had hit the sentiment of the realty sector hard. A number of retail players failed on their commitments, sending out wrong signals to the developers’ community. Things had reached a passé when developers were not too keen on taking up retail projects. The builders became too particular about sq ft calculations, return on investments, revenue sharing and so on. They were hardly getting good merchandise and without good merchandise it makes no sense to get into retail project,” he said.
Across the country, the investor sentiment has been impacted due to inflationary pressures and rising interest rates in the country coupled with the ongoing economic crisis in the euro zone and the US. In such a situation, opening up of the retail sector to FDI would mean lot of large organised sector players coming into play.
There are contrary views as well, though they remain a minority. In Kolkata, Ritwik Das, managing director of Blue Chip Projects, which has taken up a few retail property projects in West Bengal, refuses to believe that real estate players or developers, in particular, have any reason to be bullish about FDI in retail. “The way these large transnational retail players negotiate terms with builders does not help developers in any way. Builders don’t stand to gain much out of this. Even if some builders gain marginally out of this in some cases, the social impact of allowing FDI in retail would be much more telling and disastrous.”
A number of these international retail players like Wal-Mart or Bharti Wal-Mart in India prefer doing rental deals instead of sharing revenue with builders. “It would certainly go a long way in bringing back confidence of the developers,” says Saksena.
Probably, that would be the best bargain in the game.
Real estate companies, which started venturing overseas around 2006-07, are reviewing their global plans. With the slump in international realty markets, many domestic companies are either withdrawing from weak markets or putting their global plans on hold, reports Business Standard. Raheja Developers, for instance, has shelved plans to enter markets such as Mauritius and Colombo. Hiranandani Group, which has a major presence in Dubai, has changed its strategy. It’s stopped launching new projects, and is focusing on completing existing projects for other developers on a contractual basis. Omaxe has already exited Dubai.
Darshan Hiranandani, director and chief executive officer, Hircon International, a joint venture between the Hiranandani group and ETA Star, told Business Standard the company was not launching any new project in Dubai due to the slump. “Our strategy is to complete the incomplete projects for other developers on a contractual basis.” According to him, 23 Marina in Dubai, which was recently completed, has been sold out. However, the launch of Business Bay, which the company says ‘coming soon’ on its website, will not be for sometime. He was optimistic the market would recover soon.
But Nayan Raheja, director, Raheja Developers, is not so hopeful about prospects of the international market. The Dubai market would not recover, at least in the next five years, he said. “Nobody should be looking at the Dubai market as of today,” said Raheja. Raheja Developers, which was evaluating opportunities to enter Mauritius and Colombo, is giving it a miss in the wake of the global economic and realty gloom. “There is negative sentiment internationally. At this point, we are not even considering venturing out,” Raheja said. Tata Housing is one of the few companies looking overseas at this point. After establishing itself in the Maldives, the company is looking at Colombo in Sri Lanka.
Its managing director and chief executive, Brotin Banerjee, said, “We are confident of finalising a few projects in Sri Lanka this financial year — Colombo will be one of the locations. All these international projects are being planned through separate special purpose vehicles formed for each country or project.” Banerjee said the company was in the final stages of due diligence for two mixed-use development projects of two million square feet each in Colombo. Of this, one could be affordable housing. “With peace returning to the island nation, real estate will be a big growth story there,” Banerjee said. Tata Housing has earmarked Rs 1,000 crore for various ventures in 2011-12. “We work on a multi-city strategy and projects targeting all customer segments and hence, a slowdown in some geographies or customer segments does not adversely impact us,” said Banerjee.
Omaxe Group entered Dubai in 2007, with a goal of expanding in West Asia. But after investing Rs 50 crore (the first instalment of a Rs 1,600-crore project) through a joint venture with Dubai World’s property developer, Nakheel, Omaxe withdrew from the market due to a near lull. “We got the investment back, as Nakheel put the projects on hold indefinitely,” said Rohtas Goel, chairman and managing director, Omaxe. And now, the company has no plan of expanding outside India.
According to Sunil Dahiya, managing director of Vigneshswara Developers and vice-president of the National Real Estate Development Council, it is not just real estate developers, but also construction companies, which are withdrawing from the Gulf. “Indian companies in West Asia, especially into construction projects, are experiencing a near lull, as no major work is happening there. The contractors are not being paid,” he said. At least 10 to 15 construction companies present in the Gulf are suffering from the slump. Real estate consulting firm Cushman & Wakefield’s chief executive for Asia Pacific, Sanjay Verma, said, “For those over expanded, it would be a sensible move to focus on their core strength at this point.”
FDI in pension fund management companies will further increase the volume of assets that can be invested in infrastructure. India needs one trillion dollars (about Rs 52 lakh crore) for infrastructure investments in 12th plan (2012- 17), Assocham said in a statement.
Allowing FDI in the pension sector would enable the country to raise the share of fund assets to GDP from current level of 5 per cent to 17 per cent. This in turn can result in assets worth $166 billion (about Rs 8.6 lakh crore), industry body Assocham said on Monday.
FDI in pension fund management companies will further increase the volume of assets that can be invested in infrastructure. India needs one trillion dollars (about Rs 52 lakh crore) for infrastructure investments in 12th plan (2012- 17), it said in a statement.
The global funded pensions market (both occupational and work related) is estimated at $24.6 trillion of which $16.2 trillion are held by pension funds. Permitting FDI in pension funds will give access to global pension fund companies to the vast untapped Indian market, Assocham in its study titled ‘Case for Allowing FDI in Pension Funds,’ said.
A 2.1 per cent allocation of total pension fund assets to India would increase its reserves to $342 billion – about the same in Brazil in 2010.
“Going by the world trends, equity allocation of these could be as high as $160 billion. A CAGR of 16.5 per cent as witnessed in Brazil will result in total pension assets of $734 billion of which equity will be $345 billion,” Assocham Secretary General D S Rawat, quoting the study, said.
Even if one-third of it goes into infrastructure development, it would mean an investment of over $100 billion – or one-tenth of total requirement in the 12th Plan period. At present, pension and insurance funds have a limited presence in the Indian markets due to regulatory restrictions.
In 2011-12, only 4.7 per cent of funding requirement – or Rs 13,289 crore – is likely to have come from pension and insurance funds compared to 10.5 per cent or Rs 29,851 crore from external commercial borrowings. The estimated debt requirement is to the tune of Rs 2.84 lakh crore in current fiscal and Rs 9.88 lakh crore in the 11th plan.
The government has introduced in Parliament the Pension Fund Regulatory and Development Authority (PFRDA) Bill which will pave the way for 26 per cent foreign investment in pension fund management companies.
The allocation of pension assets typically is 47 per cent in equity, 33 per cent in bonds, one per cent cash and the remaining in other areas. In India, 22.9 per cent could be in equity, 16.1 per cent in bonds and the rest in others.
If pension funds are diverted to infrastructure projects, they bring long-term income streams, stability, predictable cash flows, low default rates, project diversifications and societal benefits. “It is imperative that financial sector reforms continue to offer products and services for meeting financing and risk management needs of infrastructure projects,” said the ASSOCHAM study.
A vast majority of India’s population is not covered by any formal old-age income scheme and is dependent on their earnings or transfer from family members. The unorganised sector has no access to formal channels of old-age economic support. Only 12 per cent of the working population in India is covered by some form of retirement benefit.
The implications of demographic dynamics for pension planning become more evident when one takes into account the average life expectancy of 77 years which is likely to rise to 80 in the next three decades. The population above 60 years of age by 2030 will approach 200 million.
“Large-scale reforms are thus required to ease the pressure on treasury to provide for a social security net for growing number of senior citizens as well as growing workforce,” it said.
The government’s move to allow foreign retail investors to invest directly in equities is welcome, but only an incremental step to shore up capital inflows. Already, qualified financial investors ( QFI) including individuals, pension funds and trusts are allowed to invest up to $10 billion a year in the stock market through mutual funds instead of having to come through foreign institutional investors. So, allowing QFIs to directly own Indian stocks – each of them can own up to 5% in an Indian company but their cumulative investment is capped at 10% – is an incremental step.
It will open up another avenue for portfolio investment inflow, but does not guarantee such flows. Excessive dependence on foreign fund inflows only makes the stock market more volatile. Ideally, the government should encourage long-term domestic savings into the equities market. An institutional mechanism is already in place, with the National Pension System (NPS) that allows subscribers to invest in equities and generates superior returns. Workers should be allowed to voluntarily migrate to the NPS from the Employees Provident Fund Organisation (EPFO) that does not invest in stocks.
Two, the government should also enhance foreign direct investment rather than FII investment . It should resume talks with its allies and the Opposition to forge a consensus on FDI in retail and insurance. Last year, FII outflows were the highest from India compared to BRICs and emerging markets. According to EPFR Global that tracks foreign fund flows across markets , FIIs withdrew over $4 billion from India in 2011, against an inflow of $1.35 billion in 2010. Our stock markets have also been among the worst performers, with the BSE Sensex shedding close to 25% in 2011. However, market forecast will look up as the economy is expected to grow by 8-9 % in the medium to long term. So, easing curbs on investment makes sense. It should be backed up with sound macroeconomic management to restore confidence among foreign investors and also ensure that their returns are not eroded by a falling rupee. Reforms brook no delay, to contain and prioritise spending.
The global real estate fund of Morgan Stanley is in talks with Mumbai-based Sheth Developers to invest $100 million to $125 million (Rs 530 crore to Rs 600 crore) in a residential project in Mumbai. The Morgan Stanley fund will invest in the unlisted Indian firm’s project in the western suburbs of Mumbai, Business Standard reported, citing sources.Morgan Stanley declined to comment and Sheth Developers did not return phone calls seeking comment. Sheth Developers acquired an 18-acre land parcel in Andheri from Borosil Glass Works in 2010 for about Rs 875 crore and plans to develop a large residential project there, said the sources.
If completed, the investment would be the first in India by the Morgan Stanley fund in three years, two of the sources said. The fund has invested about $750 million so far in India. In October, sources told Reuters that a bunch of investors including a fund managed by Morgan Stanley and the Government of Singapore Investment Corp are in separate talks to buy a Mumbai property from Indian textiles firm Alok Industries for about $200 million (Rs 1,100 crore). Last month, the Wall Street bank named Shirish Godbole as the head of its global real estate investment fund in India.
Indian developers have come under pressure over the past year as rising interest rates deter residential buyers and funding for builders becomes scarce as economic growth slows.