News: Indian developers queue for IPOs, foreign funds

(RTR 29/09/2006) Hong Kong - Tens, and even hundreds, of Indian developers are lining up to raise funds through initial public offerings in an attempt to ramp up construction to fill an estimated shortfall of 20 million homes.

Many of the companies are small and hope that by raising their profile, they will also attract funds from abroad.

Foreign property investors, who have earmarked around $5 billion for India's vibrant economy, are struggling to identify reliable local partners who can navigate through the country's notorious red tape and often dubious property titles.

Only a handful of developers are listed. And their scarcity during a property boom has contributed to up to nine-fold stock price gains for some firms since the start of 2005, when India eased rules on inward investment in the construction industry.

Anish Jhaveri, director of equity sales at HSBC in India, said hundreds of companies were hungry for funds. But they were small and might lack the skills and capacity to deliver rapid growth investors were after.

"Between 50 and 80 companies will be listed on a yearly basis in the next three years," Jhaveri said on a trip to introduce 11 Indian developers to private equity investors in Hong Kong.

"But we'll see a difference between the men and the boys, those who can execute projects, and those who can't. Ultimately, there'll be consolidation in around five years' time."

After heady gains, the Mumbai stock market slid in May and held up many IPOs this year, including a planned listing by DLF Universal, which developed the New Delhi suburb of Gurgaon.

But now the market has recovered, DLF is planning to resurrect a share sale it hoped would raise up to $3.5 billion.

Jhaveri said several other firms, including New Delhi-based Parsvnath Developers Ltd. and Sobha Developers Ltd. in Bangalore, have filed for IPOs, and Ambuja Realty Development Ltd. is expected to follow suit.

HOME IMPROVEMENTS

Hyderabad-based IVR Prime, a unit of listed construction firm IVRCL Infrastructure and Projects Ltd., is also preparing to file for a stock market listing within three months.

Shares in IVRCL have surged three-fold since the start of 2005, outpacing an 87 percent gain in the benchmark index.

But Ram Kumar, director at IVR Prime, said his firm also wanted to tap foreign investors for the funds it needs to expand.

He said IVR would quadruple revenue to around US$125 million in 2007, and aimed to develop 50 million square feet of land in Hyderabad, Bangalore, Pune, Chennai and New Delhi in five years.

"We've got the construction ability that small contractors don't have," Kumar said. "And we're concentrating on mass housing people can afford. Low salary people need to own houses too."

Such sales pitches have lured many big-name investors to India, including U.S. pension fund CalPERS, and the property private equity arms of Merrill Lynch, JPMorgan, and Morgan Stanley, which has taken a stake in two developers. But not all property funds are ready to jump in.

"Everyone is asking for us to take them to India, but it's not that easy," said David Blight, head of investment management at Netherlands-based ING Real Estate.

"Investing with partners you don't know well is not a considered way of entering a market."

In India, ING would follow its business model in China, where it is about to close an "opportunity fund" for development worth US$300-$350 million, but first tested the water with a couple of joint-venture projects with listed developers.

"It helps when companies go public, there's more transparency," Blight said of investing in India.

Foreign investors cannot own land or existing buildings, so they are forced to join local partners to develop, and keep their investment in the country for at least three years.

Risks include a morass of bureaucracy, difficulties buying land split among multiple owners for tax purposes and frequent contests over property titles. But projects can be lucrative.

Mumbai-listed Ansal Housing and Construction Ltd., which is planning to raise $25 million in the next two months through a preferential share placement and foreign currency convertible bonds, is touting its 30 percent internal rates of return. The company has seen its share price jump nine-fold since the start of 2005.

"The price of our land has doubled in the last two and a half years," said Ansal's vice president, Mohinder Bajaj. "And people are living in crumbling places and desperate to move."

HSBC's Jhaveri, whose income has risen 15-fold in five years, said he was a prime example.

"I don't want to live where I'm living," Jhaveri said. "I want my children to live somewhere like that," he said, pointing to a 35-storey apartment block perched half way up the Peak, a mountain that overlooks Hong Kong.