Monday, January 15, 2007

We’re bullish on small cities’

Economic Times

We’re bullish on small cities’
AJOY VEER KAPOOR is the managing director of Saffron Asset Advisors. This company was established in May ’06 to manage investments for Eredene Capital, a $100-million fund listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE). On December 6, ’06, Saffron listed Yatra Capital on Euronext, Amsterdam with a market capitalisation of e100 million (around $133 million). Currently, Saffron manages two internationally listed companies aggregating primary investment of $230 million, focused on the Indian real estate sector. Ajoy is an entrepreneur and banker, with a career spanning over 25 years and having global exposure to real estate. His previous assignments have been with HSBC and Standard Chartered Bank. AMIT BHANDARI spoke to him about his views on the domestic real estate sector. Here are excerpts from the interview:

What part of the funds under your management have been deployed already?
Saffron Asset Advisors currently manages two funds, with a total value of $100 million and $145 million. These are listed on the LSE and Euronext. Yatra, which is listed on Euronext, has the rights to take up the capital to $550 million from the current investors. Yatra has been listed only four weeks ago.
Eredene is a $100-million fund listed on the LSE. It is about six months old and 29% of the total funds have already been invested in three projects — one in Nagpur and two in Indore. The Nagpur project is a mall, while in Indore, we have a township and a mixed development. We expect to invest 60-65% of the total funds over the next two months. We are currently looking at projects in Pune, Kolkata, Trivandrum, Kochi and Dehradun.

Your current investments are all in small cities. Many of the options being evaluated by you are non-metro cities. Is this a coincidence?
Our first two funds — Eredene and Yatra — focus on tier-2 and tier-3 cities. The next fund we launch will look at tier-1 cities. We are very bullish on the mid to long-term prospects of these cities — a timeframe of 5-10 years. We are looking at launching another fund — Yatra 2, targeted at tier-1 cities — on Euronext, once Yatra is substantially invested. We could reach that stage in the next six months.
Two factors work in favour of small cities. First, post 9/11, many companies are diversifying their geographical base. Second, a big problem faced by IT majors is attrition, which can be 20-40% in big cities. A tier-2 or tier-3 city with good physical and educational infrastructure can tackle both these issues.

Do you see a bubble in the Indian real estate sector, given the way prices have moved up over the past few years?
How you read the market depends upon your objectives. Speaking for myself and for Saffron, I feel the mid to long-term story is intact. However, corrections in some sectors and some markets cannot be ruled out. One also needs to consider factors like credit squeeze by the Reserve Bank of India, pressure on the rupee, inflation and the possible impact of new measures which may be introduced in the budget. We are not worried because we are in it for the long term. There is a shortage of housing, and corporate profits are growing at 15-30%, which will lead to more recruitment and more demand. So, we are not worried.

Which are the best markets in India today?

We feel real estate is not the driver, rather it is driven by industry. Therefore, growth of various markets will depend upon the growth engines. In my opinion, tier-2 and tier-3 cities in Maharashtra present a good opportunity. Compared to Mumbai and Pune, Nagpur, Nasik and Aurangabad have a cost advantage.
They are also witnessing activity in sectors like IT and biotech. Among other states, we find Gujarat and West Bengal attractive. Madhya Pradesh is another state that has been ignored so far, but it should grow over the next few years.

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