Where is Private Equity in India’s Affordable Housing Market?

Published: Monday, March 13th, 2017 by Lenora

With the Modi government in India committing to Housing for All by 2022 as a key objective, it begs the question of financing this massive build-out of almost 20 million needed urban units and the role that private investors can play. On this topic, about a year ago, I was struck by an opinion piece in Forbes India online entitled “Affordable housing is at the core of sustainable development.”

“We see planned urbanisation on global standards as the way to reach a ‘developed’ state and not many consider peace and prosperity as ‘development’. But sustainability has a direct link with peace and prosperity. We know all real estate development and infrastructure development has to be sustainable because it is the ‘right thing to do’. However, hardly ever do we think of affordability as the core of sustainability.” – Rubi Arya, Milestone Capital Advisors

Rubi Arya, the Executive Vice Chairman of Milestone Capital Advisors, wrote this concise thought piece, from which the above quote is excerpted, about how important planned urbanization is and how the concept of affordability directly relates to sustainable cities.

She pointed also to the opportunity: private developers and private equity investors should be able to participate in these deals and expect market returns. Despite obvious enthusiasm, she ultimately recognized that small and mid-sized developers are the least able to deliver the product to these clients. Their size and corporate governance falls short of what investors require. They need hand-holding, as she points out, and this means active engagement from institutional investors and real estate private equity.

Seeing this article from one of India’s premier real estate private equity investors, I had to inquire about Milestone Capital’s view on the role of private investment in the affordable housing market. Milestone Capital Advisors - Private Equity logoIn addition to more than INR 37 billion deployed across sectors in India, Milestone also has a unique pedigree in the sustainability world.

Sustainability and responsibility as core business values. Its founder, Ved Prakash Arya, Rubi’s husband, who died in a freak accident in 2011, was dedicated to sustainable business. While at Future Group, managing Pantaloons’ real estate, he elevated the company’s corporate social responsibility efforts. Later, his interests led him to start ECOFIRST Services,  a sustainability consultancy focused on green building, which later was acquired by Tata Consulting.

Arya’s philosophy of sustainability as a core business value has remained an element of Milestone’s DNA, so sustainable housing and green real estate is a logical entry point. Nilesh Karkhanis, Senior Principal, Real Estate and Projects at Milestone Capital, believes India’s ability to grow an affordable housing market is improving, especially with the Modi government’s policy and verbal push. Milestone has already been launching new funds aimed at residential and commercial development. The firm had already made an investment in the affordable housing sector and exited successfully.

Supply side needs greater discipline, capacity and size. Given the experience, Karkhanis offered thoughts on why private equity investment in affordable housing hasn’t taken off in India: “Outside the largest few affordable housing developers, the vast majority of market players are still too small. There aren’t yet enough investable projects and developers in this range. The few players outside the big firms lack investment discipline and governance. We don’t believe they can earn a market return.”

On the other hand, Karkhanis suggests that, for market rate real estate projects, Milestone can integrate the cost of IGBC ratings into economics of these project. We know it will improve the quality of the projects. Environmental clearances are being streamlined as well, so sustainable market rate residential development already makes sense in India.”

Governance and pipeline are key. From the perspective of a private equity investor, what will be necessary to make affordable housing investable? Two major issues have to improve. First is governance. Karkhanis points out: “These smaller developers may be family run with no history of having professional outside investors. In that case, it would be too difficult for us to have visibility into how these organizations are run on a day-to-day basis. This is why you see the few big private equity investors in housing are coming from overseas and investing in the larger and better organized market players. The governance issues are managed more easily there.”

Nor can small organizations absorb the quantum of capital that an institutional investor wants to deploy. “If you deploy capital in one project, that’s all there is for some years. If we invest with a developer, we want to know that there is a pipeline and these are not one-off investments,” Karkhanis insists. “Organic growth may take some time, so we can envision some consolidation. We are already starting to see partnerships between developers.”

Need to build up smaller developers. Change is coming. Karkhanis is optimistic that the new Real Estate and Development Regulation Act (RERA) would disseminate and bring additional order to the market, even if at a somewhat higher cost. “Outside of this slow process, I can only see the government or some other entity like government somehow taking a role in building up smaller developers. Some entity that can help them to professionalize, institutionalize and build their businesses. We would very much like to see that happen.”

Karkhanis admits Milestone needs more momentum, formality and absorption capacity to encourage the firm to allocate consistently to affordable housing in India. Yet, he’s confident that Milestone’s commitment to and institutional knowledge of sustainability will serve them well when that day comes.