APG's MD and head of private real estate investments for Asia Pacific, Sachin Doshi.
Dutch pension fund APG Asset Management, which recently bought retail assets from a Xander Group-sponsored fund for about Rs 2,000 crore, is looking to continue investing in the country’s real estate sector. In an interview with ET’s Sobia Khan, the €445-billion pension fund’s managing director and head of private real estate investments for Asia Pacific, Sachin Doshi, talks about APG’s India strategy, the government’s demonetisation move and the impact of the real estate regulator on the sector. Edited excerpts.
Why invest in retail now? What does the acquisition of Xander's retail portfolio mean for APG?
Firstly, I would like to clarify that it is not just the acquisition of the portfolio but includes VR's (Virtuous Retail) 150-person-strong Indian management and operating platform as well to create a fully integrated retail real estate company, Virtuous Retail South Asia (VRSA), in partnership with Xander. We believe in the middle-class consumption story in India and see modern format retailing as an attractive long-term investment proposition. This transaction allows us to get immediate scale and access to a 3.5 million sqft portfolio of dominant shopping centres combined with a management platform that has over a decade's experience in retail in the country. The thesis is quite simple — there are many international brands that want to enter the country and domestic brands are also looking at expansion, but consistently their issue is the lack of quality malls as well as management that meet the requirements of their brand image. This shortage of space on the one hand and the large unmet demand on the other create a perfect opportunity for our new platform. All this at a time when retail sales have been growing at double digits in the country and well-performing malls have witnessed solid rental growth and are spoilt for choice when it comes to picking tenants.
What is your plan for the new platform?
With the existing portfolio of assets and available capital, the current platform has capacity to grow its asset base to north of $700 million. The shareholders' aspiration is to grow this to over $3 billion in assets in the next 3-5 years. As an evergreen structure, APG and Xander will invest more capital into the company and at the right time and valuation will also look to introduce other long-term investors into VRSA. The retail real estate story is in its early stages in India and the future opportunity is large, perhaps the most compelling of any real estate sector at present. We will leverage the management team's capabilities across development, repositioning and operations to bring more quality retail space in all the main cities to create destinations of choice for shoppers, retailers and the broader community.
What are your focus cities? Will you buy existing assets or only build new assets?
India is severely under-penetrated in terms of organised retail despite consumers' propensity to spend. We want to build malls at the right locations and are flexible to acquire existing assets, re-positioning opportunities as well as ground-up development. The target is to build malls as lifestyle destinations in the top-tier cities that cater to a large, city-wide catchment. I doubt that we will get into smaller malls, unless it's in a prime city-centre location in Delhi NCR or Mumbai, for example. About entering tier-II and tier-III cities, while the consumption potential in those markets is interesting, at present our focus is on the more institutional markets like Mumbai metropolitan region, Delhi-NCR, Pune, Bengaluru, Hyderabad and Chennai. However, in the future, selectively if there are good opportunities in smaller towns, we may look at them also, but that strategy will be tenant led.
How important is India for APG? How much have you deployed in the country?
India is an important market for us. We are a long-term player in India and believe that be it in real estate or infrastructure, the opportunity for pension capital like ours is significant. APG entered Indian real estate market in 2012 with our investment in mid-market hotel chain Lemon Tree. A few months later we formed a joint venture with Godrej Properties for mid-income residential apartments. Since then, we have also invested with Xander in a core/core plus commercial office venture and now in retail malls with VRSA. Earlier this year, we scaled up our relationship with Godrej Properties with a second development programme. All-in-all, in the last four years, we have committed over $800 million equity to real estate in India, making us one of the top 3-4 investors in the country. We are also interested in logistics and office ‘develop to core’ strategies but are yet to identify suitable partners. On the infrastructure front, we have a large lending programme in partnership with Piramal and our infrastructure team is very active in India across various other initiatives.
Can you update us on the other platforms you have in the country and how much have you deployed from them?
Our strategy revolves around identifying partners and scaling up with them over time to build on the solid working relationships we share with them. We intend to grow our relationships further with each of our partners in India across the retail, residential, commercial and hotel platforms. In some of these platforms we have invested the entire initial pool of capital and are upsizing our commitment. As mentioned, we recently topped-up our relationship with Godrej Properties with a second round of funding. We have done a couple of top-ups with Lemon Tree. If the current series of acquisitions go to plan, then in the new year we will also explore topping up the Xander-APG commercial platform that was set up in 2014.
Does demonetisation and RERA bother you as an investor?
Regardless of policy initiatives by the government we see solid fundamental demand and a good opportunity in India as long as we continue working with the right partners. To give credit to the government, some of the recent announcements like the passage of the GST legislation, notification of RERA and demonetisation will have medium-to-long-term benefits for the economy in general, and for the real estate sector in particular. Some of the immediate impact we see is rationalisation of land prices, greater transparency, improved corporate governance and a level playing field for developers and consumers. Both RERA and the recent demonetisation announcements are likely to positively impact top-tier developers like our partner Godrej, as they will grow market share. Over time, this will also lead to institutionalisation of the sector and possible consolidation. All this is very encouraging for foreign investors.
What are global investors’ views on the Indian real estate market?
India is a market full of opportunity but also many potential challenges if one doesn't do the homework properly. Like other emerging markets, partner risk in India remains high. This coupled with the poor first vintage (2005-2007) of private real estate investments in India has meant that many global investors are still cautious about Indian real estate. Having said that, given India's recent emergence as the fastest growing major economy, the government's commitment to further liberalising the real estate sector and success of early re-entrants like APG, GIC and Blackstone, many investors are looking at the market again with interest. In my mind, one of the key differences in terms of investors investing in India this time round is that the capital is not coming in finite life, closed ended fund formats. Rather, we are seeing more sovereign, pension funds and other long-term investors not limited by fund life, which in my opinion are the right kind of patient investors the sector needs. Also, the sector (developers, managers and investors) has matured in the last 10 years which makes the current vintage a lot more compelling.
Why invest in retail now? What does the acquisition of Xander's retail portfolio mean for APG?
Firstly, I would like to clarify that it is not just the acquisition of the portfolio but includes VR's (Virtuous Retail) 150-person-strong Indian management and operating platform as well to create a fully integrated retail real estate company, Virtuous Retail South Asia (VRSA), in partnership with Xander. We believe in the middle-class consumption story in India and see modern format retailing as an attractive long-term investment proposition. This transaction allows us to get immediate scale and access to a 3.5 million sqft portfolio of dominant shopping centres combined with a management platform that has over a decade's experience in retail in the country. The thesis is quite simple — there are many international brands that want to enter the country and domestic brands are also looking at expansion, but consistently their issue is the lack of quality malls as well as management that meet the requirements of their brand image. This shortage of space on the one hand and the large unmet demand on the other create a perfect opportunity for our new platform. All this at a time when retail sales have been growing at double digits in the country and well-performing malls have witnessed solid rental growth and are spoilt for choice when it comes to picking tenants.
What is your plan for the new platform?
With the existing portfolio of assets and available capital, the current platform has capacity to grow its asset base to north of $700 million. The shareholders' aspiration is to grow this to over $3 billion in assets in the next 3-5 years. As an evergreen structure, APG and Xander will invest more capital into the company and at the right time and valuation will also look to introduce other long-term investors into VRSA. The retail real estate story is in its early stages in India and the future opportunity is large, perhaps the most compelling of any real estate sector at present. We will leverage the management team's capabilities across development, repositioning and operations to bring more quality retail space in all the main cities to create destinations of choice for shoppers, retailers and the broader community.
What are your focus cities? Will you buy existing assets or only build new assets?
India is severely under-penetrated in terms of organised retail despite consumers' propensity to spend. We want to build malls at the right locations and are flexible to acquire existing assets, re-positioning opportunities as well as ground-up development. The target is to build malls as lifestyle destinations in the top-tier cities that cater to a large, city-wide catchment. I doubt that we will get into smaller malls, unless it's in a prime city-centre location in Delhi NCR or Mumbai, for example. About entering tier-II and tier-III cities, while the consumption potential in those markets is interesting, at present our focus is on the more institutional markets like Mumbai metropolitan region, Delhi-NCR, Pune, Bengaluru, Hyderabad and Chennai. However, in the future, selectively if there are good opportunities in smaller towns, we may look at them also, but that strategy will be tenant led.
How important is India for APG? How much have you deployed in the country?
India is an important market for us. We are a long-term player in India and believe that be it in real estate or infrastructure, the opportunity for pension capital like ours is significant. APG entered Indian real estate market in 2012 with our investment in mid-market hotel chain Lemon Tree. A few months later we formed a joint venture with Godrej Properties for mid-income residential apartments. Since then, we have also invested with Xander in a core/core plus commercial office venture and now in retail malls with VRSA. Earlier this year, we scaled up our relationship with Godrej Properties with a second development programme. All-in-all, in the last four years, we have committed over $800 million equity to real estate in India, making us one of the top 3-4 investors in the country. We are also interested in logistics and office ‘develop to core’ strategies but are yet to identify suitable partners. On the infrastructure front, we have a large lending programme in partnership with Piramal and our infrastructure team is very active in India across various other initiatives.
Can you update us on the other platforms you have in the country and how much have you deployed from them?
Our strategy revolves around identifying partners and scaling up with them over time to build on the solid working relationships we share with them. We intend to grow our relationships further with each of our partners in India across the retail, residential, commercial and hotel platforms. In some of these platforms we have invested the entire initial pool of capital and are upsizing our commitment. As mentioned, we recently topped-up our relationship with Godrej Properties with a second round of funding. We have done a couple of top-ups with Lemon Tree. If the current series of acquisitions go to plan, then in the new year we will also explore topping up the Xander-APG commercial platform that was set up in 2014.
Does demonetisation and RERA bother you as an investor?
Regardless of policy initiatives by the government we see solid fundamental demand and a good opportunity in India as long as we continue working with the right partners. To give credit to the government, some of the recent announcements like the passage of the GST legislation, notification of RERA and demonetisation will have medium-to-long-term benefits for the economy in general, and for the real estate sector in particular. Some of the immediate impact we see is rationalisation of land prices, greater transparency, improved corporate governance and a level playing field for developers and consumers. Both RERA and the recent demonetisation announcements are likely to positively impact top-tier developers like our partner Godrej, as they will grow market share. Over time, this will also lead to institutionalisation of the sector and possible consolidation. All this is very encouraging for foreign investors.
What are global investors’ views on the Indian real estate market?
India is a market full of opportunity but also many potential challenges if one doesn't do the homework properly. Like other emerging markets, partner risk in India remains high. This coupled with the poor first vintage (2005-2007) of private real estate investments in India has meant that many global investors are still cautious about Indian real estate. Having said that, given India's recent emergence as the fastest growing major economy, the government's commitment to further liberalising the real estate sector and success of early re-entrants like APG, GIC and Blackstone, many investors are looking at the market again with interest. In my mind, one of the key differences in terms of investors investing in India this time round is that the capital is not coming in finite life, closed ended fund formats. Rather, we are seeing more sovereign, pension funds and other long-term investors not limited by fund life, which in my opinion are the right kind of patient investors the sector needs. Also, the sector (developers, managers and investors) has matured in the last 10 years which makes the current vintage a lot more compelling.
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