The Canada Pension Plan Investment Board has found a toehold in India's fragmented residential real estate sector with a new partnership to provide debt financing to developers.
The fund, which invests money on behalf of the Canada Pension Plan, said Wednesday its financing arm, CPPIB Credit Investments Inc., has formed a strategic alliance with India's Piramal Enterprises Ltd. (PEL) to provide $250-million (U.S.) each toward a debt financing operation for residential projects in many of India's largest urban centres.
CPPIB said the focus for the investments will be top-tier local developers with a strong track record in building residential projects. The key cities for financing will be Mumbai, Delhi, Bangalore, Pune and Chennai, which CPPIB said also have good civic infrastructure, strong employment and favourable growth forecasts for demand for middle-income housing.
The deal comes just months after CPPIB unveiled its first real estate deal in India in November, announcing a strategic alliance to acquire office park buildings in India's major cities. CPPIB committed $200-million (U.S.) to own 80 per cent of a venture with partner Shapoorji Pallonji Group.
CPPIB has increasingly turned its investment focus to emerging markets in Asia and Latin America, arguing they have a higher growth rate and better long-term demographic trends for growth.
Wenzel Hoberg, CPPIB's head of European real estate investing who oversaw the Indian deals, said the fund already has done real estate investments in China and Brazil, and has targeted India as its next major emerging market.
"There are plenty of other emerging markets, but most of them are smaller.... These are the big elephants," he said. "If you want to go into emerging markets, you want to tackle those."
He said CPPIB was sold on the potential of the fast-growing residential sector given India's growing middle class, but needed to find a way to invest in the highly fragmented residential sector without trying to take tiny equity stakes in local developers. The solution was an alliance with a strong partner to provide debt financing, primarily for land acquisition by developers, he said in an interview Wednesday.
"By going via debt [financing], we basically have one partner for a national platform, and we can aggregate a lot of little deals into a big package," he said. "It's a very convenient way for us to access it."
Debt financing is also lower risk than taking ownership stakes, he added.
In India, land is often purchased in small pieces and aggregated into larger packages by a land aggregator, which then sells the parcel to a developer to construct a multi-unit building. Mr. Hoberg said the developers typically can access bank financing only for the construction phase, but often have to finance the land acquisition themselves.
That can become a major commitment of capital because it can take two to four years to get all the permits in place to begin construction. The new joint venture hopes to find a niche to provide financing for the land purchases.
"We are really filling in a gap that exists in the market today where developers don't have many other sources of funding," Mr. Hoberg said. "That's kind of an interesting window."
He said CPPIB will assess the success of the venture before deciding whether to commit more money to the partnership.
PEL chairman Ajay Piramal said CPPIB's latest venture in India is ideally timed given the strength of the country's real estate sector.
"This is an opportune time to be creating an aligned pool of capital to target what we believe to be very compelling financing opportunities in the real estate sector," he said in a release Wednesday.