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Chetan Dave: Evolution of the Real Estate Sector in India
August 21, 2007
The Real Estate Club organised a talk by Chetan Dave on the current scenario in the real estate sector. He gave a primer on the sector and then a Q&A session for topics beyond basics in both private equity as well as the real estate sector.
Chetan Dave is currently CEO and MD of Sun-Apollo Real Estate Fund, a venture between the Khemka family, Sun Group and Apollo Real Estate Advisors, which manages equity funds worth USD 5.2 Billion. The Sun-Apollo RE fund has in its corpus a whopping USD 650 million to invest in India and to its credit has recently picked up 50% stake in a 58 acre, Rs 1,800 cr. real estate project near Chennai.
Dave gave an overview and evolution of the real estate sector in India. He elaborated how the growth in the sector will bring in new players both in the development, financial or other related areas. This growth will also offer exciting and new career opportunities.
He divided the world into two based on the liberalization in the real estate sector, Pre-Press Note 2 and Post Note-2 World. In the Pre-Press note 2 world, all loads led to government. Government still has a major impact on the sector. The IT/ITES boom also had a huge impact on the RE sector. Pre Press note 2 RE was a restricted sector and was as restricted as Atomic Energy! But due the restrictions in the real estate sector, the growth in the IT sector could not be met by a corresponding growth in infrastructure and real estate was causing a bottleneck in IT growth. The government never thought that the RE sector was a potential, they only thought of removing the roadblocks from the growth of the IT sector.
Post Press note 2 – liberalization of the real estate sector coupled with the higher yields the sector was offering were the main reasons for the rise of the sector. The yields were higher than any other place in the world. Initially the risk in India was higher than some of the developed markets, so institutional investors were looking at an arbitrage opportunity. The sector would grow only if the perception of risk came down or the yields went up – capital flows happen. The IT/ITES sectors helped reduce the risk premium. Over the years, RE has become mainstream, leading to huge run up on property prices. Several billion dollars have been raised from the primary public markets and this should continue at a moderate pace over time.
Dave elaborated that the RE sector is a large, huge diversified sector, one with many verticals such as land, design/construction, development, investment, lending etc. As India is experiencing the growth curve, moving forward many companies will be spawned in each of these verticals and offer great career opportunities. The sector is very important for the government as it is a big generator of tax revenue. Urban planning is very critical to any growing city and provides huge opportunities and liabilities. People tend to discuss, urbanization of India, if good planning and development doesn’t take place in our cities, we are heading for “ruralization of Indian urban centers”.
Real Estate development is taking place in Residential, Retail, Office, Hotels, Warehousing and Industrial sectors. The key drivers of each of these property types are basic fundamentals. The IT/BPO sector is expected to generate 100Mn sft of demand for office space over the next five years. The rising middle class and its consumer demand is driving the retail boom – around 22 malls are under development. The large shortage in the housing sector will continue to fuel the growth in the residential market. The real demand is not in the high end residential market but in the affordable housing segment and this will be the driver for the residential market.
Moving forward Real Estate finance will also see growth in all areas of Public and Private: Debt and Equity. In the private equity space the market is currently governed by the high networth individuals, PE funds and closed ended funds, mutual funds (slowly coming in). Banks and NBFC’s are the only players operating in the debt market. Quasi-public agencies and mezzanine funds will be the next movers into this sector. As the market grows, the private debt operators will move towards public equity. We have already started witnessing this in the form of IPO’s by developers. REITs and mutual funds will make it easier for individual investors to invest in RE and further make the risk more diversifiable for the market as a whole. There is no public debt market in India. Players in this sector include life insurance companies and fixed income funds who expect a more fixed income and come into a market when it reaches a developed stage and offer their clients a fixed income.
Overall, with further growth in the sector, career opportunities are only getting better. There are many ways to participate in this growth - public equity, private equity, debt development, investment, sales, research, leasing, property services, entrepreneurial ventures, public policy, govt. agencies, planning, architecture/engineering, investment banking etc.
The main challenges in the future also offer opportunities as they require solutions in various forms. Urban planning is the single biggest challenge for our cities. It is imperative that our urban infrastructure keeps pace with our economic growth. Better roads will help bring down the supply demand gap of land in future. Good roads will help increase supply of land and bring down property prices. Land acquisition reforms also offer many challenges. Astronomical government stamp duty rates increase property transfer costs and high costs come in the way of securitized debt market and efficient mortgage markets.
Dave has an MBA from Columbia Business School, New York, a Masters in Architecture and Urban Design degree from Washington University, St. Louis and a Diploma in Architecture from CEPT, Ahmedabad, India.
Chetan Dave, brings with him a wealth of experience and knowledge of the real estate industry. His over 17 years of experience in the real estate industry include roles such as Chief Investment Officer and Head of Development for Transwestern in Houston, Texas and a Principal in the real estate group of J.P. Morgan New York.
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