“In investing, the highest returns are made when investing in periods of fear and uncertainty when the wider market misprices securities of Grade A assets.”
“Be greedy when others are fearful and fearful when others are greedy.” The sage of Omaha, Warren Buffet said this in one of his many letters to investors and has since put it to great use buying blue chip companies in periods of distress like Goldman Sachs, Mars, Bank of America, Dow Chemical during the 2008 crisis. Now, Kunal Moktan, Co-Founder and CEO, PropShare Capital (propertyshare.in), explains how you as an investor reap risk adjusted returns from property market during COVID-19:-
Kunal Moktan says, “In investing, the highest returns are made when investing in periods of fear and uncertainty when the wider market misprices securities of Grade A assets. During my tenure at Blackstone Real Estate Fund, we used the 2008 crisis to buy some of the highest quality assets in Bangalore, Pune and Mumbai at double-digit yields leading to significant gains when they were later listed in the REIT. COVID-19 is another such opportunity to use a temporary dislocation in the markets to reap higher risk adjusted returns in Grade A commercial real estate. A crisis of this proportion affects asset owners in three ways.”
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Moktan adds, “Leveraged developers and asset owners find it increasingly difficult to service debt payments that leads them to start selling their prime assets. I say prime assets because these are the only ones that become tradable during these times. It is similar to what happens in debt funds when faced with redemptions. The first ones to get sold are the blue-chip companies in the fund’s portfolio.”
Moreover, Moktan says, “Developers are themselves opportunistic investors. In periods of crisis, they see better opportunities to deploy their capital into higher yielding opportunities like land or projects of other distressed developers. Land prices fall steeply making them very attractive for long term developments. Tier 2 and 3 developers with weaker balance sheets run into cash flow problems selling their unfinished projects to stronger developers.”
Further, Moktan adds, “Public markets – both debt and equity – collapse suddenly making it difficult to raise funds through IPOs, secondary offerings, rights issues etc. Stressed asset owners thus turn to the private market – private equity funds and debt funds thus providing leverage to these capital providers to extract higher returns.
“All of these provide an opportunity for investors to buy Grade A assets at lower prices which necessarily mean high yields (or “cap rates”). Grade A assets by definition also come with marquee multinational tenants that are more stable during a crisis. Multinational companies have long term commitments in people, technology and infrastructure that make them the perfect tenant from a long term perspective. Apart from these, having simple rule-of-thumb metrics like longer lock-in periods, fit-out capex spent by tenants, purchasing at discounts to replacement costs etc can help investors make better investing decisions,” Moktan said.
“Institutional investors have already started pouring in billions of dollars into new real estate funds to buy distressed assets. Blackstone, KKR, Terra Capital have raised billions of dollars from pension funds, family offices and HNIs in order to buy distressed assets. Profiting from distress requires ready capital at hand that can be deployed swiftly, efficiently and opportunistically and through the right investment manager,” Moktan added.
“However, for an ordinary investor, to participate in these opportunities is virtually impossible. One way of accessing these opportunities is through the Distressed Opportunities Strategy (PDOF) that are available on leading tech-enabled commercial real estate platforms, which are also regulated by Securities and Exchange Board of India.. This approach was taken to address the current scenario. While the initial expected interest was between Rs. 20-30 crores, there was an overwhelming response from the interested investors that exceeded Rs. 400 crores within a week after the launch. According to a recent Preqin report in April 2020, there were over 900 funds that were raising money targeting $300 billion, a record,” Moktan concluded.
