Of all the lofty dreams spun around the India Growth Story, none is as compelling as its real estate narrative. From nowhere in the middle of the last decade, the country’s property market has raced like a horse on steroids to reach a size of $50 billion. In every city and town, an endless row of nouveau riche has surfaced, having traded their land and buildings for unprecedented sums. By now, Indians have come to believe that buying property is the surest way of doubling their money every two or three years.
It was in the middle of this mayhem in 2008 that Ramesh Jogani decided to walk out of an investment deal in a development project in New Delhi. It first appeared to be an insane decision given that anything was selling at any price then. As the CEO of one of India’s earliest real estate venture capital funds, Jogani could have also used that project to enter the lucrative property market in the National Capital Region.
But the deal fell through on a single point. The builder had promised to cap the development cost at Rs. 1,300 per sq. ft., something that Jogani couldn’t believe. He reckoned that the actual cost would end up crossing Rs. 1,700 per sq. ft. given that a high-rise needs extra investments in fire-fighting equipment, security systems and such.
“We knew instinctively that the project would not work and so we cancelled the deal,” recalls Jogani, a 46-year-old movie buff who grew up in Mumbai watching classics such as The Godfather, Fiddler on the Roof and Sholay. It turned out that he had got the plot right. The actual cost of that project zoomed to as much as Rs. 2,000 per sq. ft., shrinking the profits for its investors.
It is through such contrarian thoughts that Jogani has built Indiareit, a Piramal Group venture, into one of just half-a-dozen real estate fund houses in the country to have made profits and returned money to investors. Of the 46 real estate funds that have invested in India, 38 or 39 have not yet been able to give returns to investors. They have been the victims of all the excesses of a bubble such as investing in overcapacity or at the top of the
On the contrary, Indiareit has not only made profitable exits, but has also gone back regularly to investors to raise more money. It is thus in an exclusive club that includes powerhouses such as HDFC and Kotak.
The figures speak for themselves. Indiareit’s three domestic funds and one offshore fund have made successful exits from various properties at an internal rate of return in the range of 19-31 percent. The percentage of money returned to investors ranges from 40 percent to 65 percent of the corpus of each of these funds. It is this success that has now attracted Religare Enterprises to consider acquiring the fund house.
Those who know Jogani say that his success is largely the result of the fact that he comes from a builder’s family. Unlike the financial wizards that populate the venture capital scene, Jogani thinks like a developer and not just like a money manager. “He knows how much risk to take and also when exactly to get out,” says Ambar Maheshwari, head of DTZ, a property consulting firm. Jogani knows the land price in any given area, knows how much a fire hydrant costs and what is the labour charge for fixing an elevator. He also understands at what price demand begins and where it ends.
And here comes the tour de force. Jogani is already planning to take his developer links to the next level. He is shaping a business plan that will remove one layer in the construction industry, merge the developer and the venture capitalist into one and bring down prices for homebuyers. If his plan works, it could ‘change the game’ for builders and real estate funds alike, industry players say.
Not the Contrarian
Until 2005, Jogani hadn’t managed any fund or specialised in finance. His years had been rolling by in the management of the family business. But Jogani Constructions, which had once been one of the top builders in Mumbai, had split and it was a lot less fun for Jogani to run a smaller business.
“It would have been very cumbersome to take this business up to a new level,” he recalls.
Between his movies and trips to Prague and the south of New Zealand, his favourite getaways, he began contemplating a career change.
One day he happened to catch up with a long-time friend Anil Ahuja, the Asia head of private equity firm 3i. Ahuja took him to Ajay Piramal, one of India’s foremost pharmaceutical entrepreneurs with a growing interest in real estate. Piramal’s fledgling venture capital fund, Indiareit, was looking for a head. Jogani seized the opportunity and switched over to the money management business at Indiareit. Of course, he negotiated for a 15 percent stake for himself in the company.
The initial days were tough. Jogani recalls the long hours he spent on the road meeting investors and distributors. But 2006 was also the time when a host of real estate funds had flooded the market. Many were backed by large banks or financial institutions and others had fund managers with a dedicated track record at the helm. Indiareit had neither. Jogani had never managed a fund and came with a property developer background. Later events would show this to be a strength but back then, he knew he didn’t have a compelling story to sell to investors. Infographic: Sameer Pawar
In January 2006, he walked up to his promoter and made his first out-of-the-ordinary move. He had identified a property in Mumbai’s newest business district, the Bandra Kurla Complex, and wanted Piramal to put in Rs. 140 crore of his own money in it. “I told Ajay [Piramal] that he needs to seed a project with his personal money and then show investors what we have done with that. Only that will give them confidence,” recalls Jogani. It took a little chat to convince Piramal but in the end, Jogani got the money.
The ploy worked. Indiareit raised Rs. 430 crore in its first round. The deal he offered investors was very simple. He promised to stick to common sense: He would invest only in metro cities, take no loans, enter projects early at the land purchase stage and go for profit-sharing arrangements with the builders.
Some investors thought this approach was contrarian in an era when high-flying fund managers invested aggressively in projects, bet big on small towns, leveraged robustly and prodded developers to be ambitious. To them, Jogani patiently explained that there was just one way real estate investments succeeded and that was conservatism.
One way the approach manifested itself was the way Jogani avoided investing in small towns. In 2006-07, most real estate funds were gung-ho about small town India. They had flooded developers in towns such as Nashik, Allahabad and Vijayawada with money and had driven up prices. Most argued that the growth rate in those cities will be higher than in mature markets like Mumbai.
But Jogani had his reservations about small towns. He knew that in such places land outside town limits has little value. Most of the projects that fund managers chased were coming up in the outskirts of these towns where even basic amenities such as water and electricity were sporadic. Jogani figured land was cheap in there for a good reason. He saw no reason why his investors’ money should go there.
He chose Mumbai, Pune, Hyderabad, Bangalore and Chennai for investing. He wanted to go to Delhi too, but beyond that one non-deal, he couldn’t come across anything promising there.
On the other hand, several funds deployed significant amounts in smaller cities. Most such projects failed to take off. One of the things that these funds had banked on was easy approval from local authorities but that also proved to be a mirage. With demand sluggish, developers were caught in a bind when the slowdown hit.
Another anomaly that Jogani found was the obsession of real estate venture capitalists with a 20 percent internal rate of return. As long as a builder was willing to promise that level of return, they were willing to pour any amount of money. Often, builders of successful projects made stupendous profits and gave only 20 percent returns to the funds. In the bad projects, it was difficult to even see any money; so the question of a 20 percent return didn’t arise. Either way, the funds lost out.
Jogani insisted on not allowing his developers to cash out like that. “Ramesh had been a builder in the past and so knew that this would never work,” says Boman Irani, managing director of Rustomjee Constructions. Indiareit tied up with smaller developers who granted it a share in the profits. It also insisted on being a joint bank signatory to the project with the right to take over its development.
“If a developer is doing badly, you’ll never see your money and if he’s doing well, then why should a fund restrict its upside to just 20 percent?” asks Jasmeet Chhabra, director of investments at Indiareit.
A key element of Jogani’s investment style is a clear exit strategy. He doesn’t put money in a project unless he knows he can sell the investment within the horizon of the fund. For instance, he avoided hotel projects where he saw no clear exit option. It takes anywhere between five and seven years to identify land, get clearances and build a hotel. That leaves very little time for a fund like Indiareit to profitably sell that investment.
Similarly, Jogani also avoided retail space development. There, rentals kick in only when tenants move in and any delay could push up costs substantially.
But of all the rules that Jogani works with, the most important is his obsession with affordability. He always dissuades builders from getting carried away by the demand and increasing prices.
A case in point is the Blue Ridge integrated township project in Pune, where Indiareit is an investor. Paranjape Schemes, the builder, initially priced the apartments at Rs. 3,000 per sq. ft. Jogani convinced the builder to drop the price to Rs. 2,800 per sq. ft.. The project saw a healthy increase in demand at once.
All would have been well if the builder had not raised the prices again. He took it up to Rs. 4,500. Flats did get sold at that price, but when the downtrend hit, all those who had booked at the higher price cancelled their bookings.Blurring Lines
The biggest recognition of Jogani’s success came sometime last year. UK-based real estate investment firm Trikona was looking to appoint a fund manager in India to manage as much as £250 million. It took the unusual step of conducting a ‘beauty parade’ of 39 funds in the country.
After initial hesitation, Jogani participated. It helped that the portfolio required somebody with development experience. Against the country’s financial powerhouses, Jogani walked away with the corpus. The deal helped take Indiareit’s assets under management to $1 billion.
But Jogani can’t rest on his laurels. This is a business where innovations can be and will be copied quickly. None of what Jogani does is difficult to reproduce in another fund. So, he needs to innovate consistently to stay ahead of his competitors.
Jogani says he is already doing that. His plan is simple. Developers in India typically make a profit margin of 25 percent, too high by international standards. There is some scope for moderation there. Jogani believes a fund house like Indiareit can drive the change.
The way the business now works is as follows: The developer raises money and buys land; gets buyers to book flats. Periodic payments from buyers fund the construction. The developer repays his lenders and keeps the rest. The risk for the developer is only that of land.
The way Jogani wants to make it work is as follows: He will float a property-centric fund with a targeted return of 20 percent. He will ask homebuyers to pay money upfront as soon as the land is identified. That money will be used to buy the land as well as construct the houses. Buyers get possession.
The developer’s margins (usually 25 percent) are passed on to the buyer. In other words, the price of the flat comes down to that extent, because there is no separate developer to take away the profits.
Industry players say this is an innovative concept that could very well work, but difficult to pull off without a nuanced understanding of the construction business. The risk is primarily that of execution. Jogani has no problems in that area as he is only playing to his strength.
Not long ago, Jogani made the crossover between construction and fund management. If his new plan works, the lines between the two professions could increasingly blur.
“Investing in real estate anywhere in the world is part science and part art,” says Shobhit Agarwal, joint managing director for capital markets at Jones Lang LaSalle India. “While other fund managers usually get the science right — focusing on the numbers and returns — Jogani has managed to marry the two.” (Edited by S. Srinivasan)
(This story appears in the 22 April, 2011 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)