Exclusive: Milestone Capital raises $31m so far for commercial realty fund

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Rubi Arya, Executive Vice Chairman, Milestone Capital

Having raised almost $31 million of its $216-million commercial real estate fund, realty-focused private equity firm Milestone Capital Advisors is looking at making 4-5 more investments during the year.

The Mumbai-based company is close to making its first investment from the fund later this month. Milestone Capital has also closed its residential real estate fund from which it has already made three investments.

Formed in 2007, Milestone Capital is a privately held alternative investment advisory firm. It has now fully exited five of its earlier funds, taking its total exits to over Rs 4,000 crore.

In an interview with DEALSTREETASIA, Rubi Arya, executive vice chairperson at Milestone Capital, talks about the current investment environment in Indian real estate and the company’s future plans.

There are talks about a funding slowdown especially in real estate. How do you view the current investment climate in India?

We are seeing a fundamental shift in how business will be conducted in the real estate industry. Various policy initiatives such as the Real Estate Regulation Act (RERA) will change the landscape of the sector in the long term and move towards a more robust corporate governance framework and higher transparency. For institutional investors like us, this is a big positive.

Though the real estate sentiment for residential assets is slightly subdued, we have not seen a reduced funding activity till date. In fact, the residential segment still accounted for more than 75 per cent of PE investments in India for 2016. For the near to medium term, developers will focus more on aligning themselves with RERA, and completion of projects on hand. Till that time, a reduced pace of new launches is expected.

Considering the sector as a whole, we are seeing increased funding interest for commercial real estate, focusing on the affordable and mid segment bracket. As per market estimates, commercial real estate would beat its earlier peak of 2014 and garner more than $3.5 billion investments. In light of reduced residential launches, funding activity will be driven by refinancing transactions, last mile funding, affordable housing and commercial asset investments.

We now see a lot more PE investment coming into real estate. How do you view competition?

It is my belief that the ability to foresee and not just forecast is critical to stay ahead of the competition. Milestone has been a first mover and worked across asset classes, including commercial, residential, warehousing and retail across India. We launched India’s first private REIT-like fund, forayed into affordable housing when it was not a buzzword and we were one of the first institutional investors to invest in the warehousing space on the back of our development, operational and asset management capabilities.

Competition, of course, in this space is fierce as a lot of capital is chasing the same opportunities. We have seen various big ticket size investments and platform level deals providing growth capital to developers. Our differentiation is to focus on smaller ticket sizes, especially for residential with tenure of 30-36 months. This segment of investments has provided us healthy returns and we continue to focus on them. Within this space, we have further identified mid-segment and affordable housing as key areas and continue to deploy in this strategy. Pre-leased commercial real estate segment is also throwing immense opportunities and a boom in micro commercial assets is expected which can surpass the residential boom of the last cycle.

Last year, you had announced raising a Rs 1,400-crore commercial real estate fund. What is the status of that fund?

Yes, we had launched the fourth private REIT like fund last year after full exits from our earlier similar funds. The fundraising is going strong although a few months following demonetisation did see slowdown in activity. We have raised about Rs 200 crores for this fund and have received healthy interest from ultra HNIs, insurance companies and family offices.

Have you started deploying the fund? 

We are at an advanced level of due diligence and documentation for a couple of investments. We shall be making the first investment in this month in the commercial capital of Mumbai. Other markets where deals are currently being evaluated are Pune, Noida and Bangalore.

You were also raising a residential real estate fund. Have you closed that?

Yes. We have closed the fund and made three investments till date. We are closing on another investment from that fund shortly. This fund is a structured debt fund with a strategy of investing in mid-segment residential market across key identified micro-markets of tier I cities.

Would you look at raising another fund any time soon?

Currently, our key primary fund being marketed is Milestone Commercial Advantage Fund. Pre-leased commercial assets provide an attractive opportunity to generate healthy returns and we look to leverage this positive market scenario and our expertise in the commercial segment.

How has 2017 been so far for Milestone Capital and what is your outlook for the year in terms of the number and amount of investments you plan to make?

2017 has begun on a very exciting note with both the changes in the real estate sector and new product launches from Milestone on the AIF and PMS product platforms. We have now fully exited five of our earlier funds making our total exits in excess of Rs 4,000 crore. With these exits, Milestone is one of the few funds which have given back more than 130 per cent of the capital back to our investors.

On the fundraising and deployment side, we expect to continue the momentum in the commercial fund and the same shall be deployed in key growth markets. With the deal flow being very robust, we expect to close out 4-5 investments in this year.

What do you look at while deciding to invest in a projects? Have the factors changed over the years?

I believe the critical factors in real estate remain more or less the same; however, the change is more in terms of the product/ strategy adopted to leverage the prevailing market and economic scenario. Attractive location, developer execution track record, mitigated or no approval risks and healthy risk adjusted returns are the key factors.

To give an example, we have had a good experience in debt products for residential assets as we introduced such structures six years back and over the period have returned over 20 per cent IRR per year across these investments. However, going forward, given the falling interest rate regime, high-yield debt products will cease to excite developers. In my opinion, PE players will have to revisit the drawing board to change the nature of their participation in real estate and will need to take quasi-equity positions or pure equity positions to achieve targeted returns. Such transactions, however, shall primarily be with developers with a strong track record of execution and timely repayment to investors. To take such a position, it will be key to be more hands-on in respect of knowledge of micro markets, project development, statutory approvals and processes and operations management.

You have had very successful exits in the past? Can we expect more exits from you this year?

Till last year, we had fully exited all of our commercial funds and one residential fund. Some of the notable exits were our sale of 247 Park to Blackstone, exit from investment with Godrej Properties, ATS Group Noida, and Neptune Developers. Already, in 2017, we have exited from our investment in Bhiwandi for a warehousing park and a residential investment in Chennai. We have other exits lined up for 2017 and see additional exits of Rs 400 crore in this year.

Are there any plans of diversification or venturing into newer areas that might be of interest?

As a fund house, our key focus area has always been real estate and we shall continue to do so. Within real estate, we are seeing new drivers of growth. Commercial real estate in the Grade A category, affordable housing, warehousing and logistics parks are looking very exciting. For the commercial segment, we already are investing through our latest fund and pre-leased micro commercial spaces are a special focus area for us. I also see increased interest both from developers and investors for affordable to mid segment housing. Post the budget, this sector looks even more attractive and institutional interest has increased tremendously. Also, with one of the few players in the organized space with experience in investment in warehousing, we will continue to take exposure in warehousing while bringing in the corporate culture to establish large format multi-discipline logistics parks.

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