India: Changing Investment Strategies

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19 May 2009

Shazaad Dalal Shahzaad Dalal, Vice Chairman and Managing Director, IL&FS India, discusses how their investment strategy has evolved.

As a fund, have you had to change your strategy in any way or are there any particular lessons you have learnt from the global financial downturn?

We have learned lots of lessons and we are changing our strategy continuously. When we first started investing, around 2006 onwards, we were driven by momentum; we were fortunate in that we bought-in very early on and that momentum has sustained us. But even in the present downturn, our fund looks quite ok in terms of valuation and we will still make reasonable returns. Our focus on certain sectors has dropped to zero, we are out of retail development, we are scaling down IT, we are focusing on residential developments, and selectively in commercial and industrial. This forms the Fund’s strategy along with an investment structure that protects capital. We are also very heavily involved in infrastructure as an institution, and have a separate specific fund for infrastructure. We are investing in roads, ports, power, renewable power and water.

All asset values have come down, and so will real estate. However we anticipate that the decline in real estate will be lower and less volatile than the capital markets.

Do you think a bubble existed in India?

Asset prices were too high, no question and they went up too fast. But a bubble implies that it is overpriced several times over. We are seeing a correction, clearly. Land prices in India are a difficult ball game completely because no two land parcels in the same city and in the same vicinity are alike and as most urban land parcels have several infirmities including tenants, squatters, encroachments etc. and are almost impossible to value. Depending on these deformities, and how much time, effort and money it will take to correct them, will determine the land price. Some people only want clean land, which is scarce in Tier I cities in prime areas.

Do you invest solely in India?

In everything else we invest only in India but in infrastructure we invest in India, South East Asia and China. As an institution, we are actively looking at what we can do in Africa so that might happen in the next few months. As far as Fund Management is concerned, we focus on the emerging markets and we will not go to the developed markets in the near term.

Are individual investors able to obtain mortgage finance?

I think it is very easy to get finance in India in the mortgage market. We are very fortunate that the mortgage market hasn’t slowed down in India except at the very high end. In the normal mortgage market we have HDFC & State Bank of India and other nationalised banks, which are all providing mortgages without any problem. Mortgage rates are pretty attractive today as compared to a few months ago and are expected to fall further in the next 12 months.

Is the housing market driven by domestic demand?

The real estate sector in India is driven only by domestic demand. International demand only has a very limited role to play. The only difference international demand made is that a few developers accessed international Funds and become well capitalised and this has enabled them to take on larger projects. A number of developers also listed themselves in the stock markets but valuations have been extremely volatile. So I feel investors like us are better off investing in discreet projects with defined cash flows rather than getting into listed entities.

Do you think sustainability will remain high on the agenda?

I think environmental sustainability is something that India is focused on and today if you built any reasonably sized development in India, you cannot develop it well if you don’t have water harvesting, recycling and some plan to reduce energy consumption. So I think all these things will be looked into in detail by the regulators on the environmental side; I think this is very important. As a fund, we are insisting to our commercial developers and commercial developments to at least get a gold rating from LEED. It is getting increasingly critical to do that and what we have also seen is that if you want to get finance from the international banks, the rating of environmental sustainability is quite valuable to them.

Source: Cityscape Ingelligence