Since 2003, IREO (India Real Estate Opportunity) has raised and mostly deployed US$2 billion in capital to develop real estate across the burgeoning India marketplace, and is recognized as the largest private equity fund devoted to the Indian real estate sector. Its portfolio consists of large-scale master planned projects and encompasses residential, office, retail and hospitality properties, as well as recreational facilities and industrial parks.
Having acquired some 4,000 acres of prime land and assembled a team of 600 people, IREO has four hospitality projects under development in Gurgaon and Goa, and plans to create a midmarket, condo-hotel brand before launching an IPO or REIT, or scheduling an exit in seven to 10 years.
HOTELS spoke with the head of IREO’s hospitality business, Senior Vice President Pankaj Dugar, about the specifics of its hospitality development program in a market with a dearth of quality hotel products and long-term strong demand drivers. Dugar joined IREO three years ago after a career that included working for Hyatt for several years as vice president of real estate and development. In fact, he developed the Grand Hyatt Mumbai and led the launch of Hyatt Place in India.
HOTELS: Who are IREO’s investors?
Dugar: A lot of endowments such as Notre Dame University, pension funds, sovereign wealth, high net-worth individuals. All the money was raised outside of India – primarily in the United States and Europe.
HOTELS: Who are the principles in the company?
Dugar: Anurag Bhargava is chairman and co-founder – responsible for investment strategy and review; Lalit Goyal is vice chairman and managing director – responsible for business development, joint ventures and strategic alliances; and Louis Klein is a founding partner and the real estate development strategist.
HOTELS: Tell us about your hotel projects.
Dugar: The first investment in Gurgaon is IREO City, a US$750 million, 1,000-acre (404-hectare) mixed-use development. Its point of difference is the international-quality master plan being executed using best practices to better design and plan the various projects within the development. This is a game-changer for India.
Thirty acres (12 hectares) are being used to develop a 460-room Grand Hyatt with serviced apartments. There is also large, Grade A office space, high street retail and an additional 265 Grand Hyatt residences for sale. Foster & Partners architectural firm out of London is doing the master plan and Tony Chi is designing the hotel.
We are looking to break ground in the coming quarter and open in December 2016. This project has the potential to become the city center.
HOTELS: Why did you choose Gurgaon?
Dugar: There is a mismatch of demand and supply in the city. There is more graded commercial office space than Delhi with strong growth in the services and finance sectors, which has led to strong demand for rooms and the highest RevPARs in the country. There are not enough MICE facilities and for F&B people continue to go to hotels. There is unmet demand and we saw a need for this project.
HOTELS: What else are you developing?
Dugar: For US$100 million-plus, we are developing a large track of land, 150 acres (60 hectares), north of Goa with a Banyan Tree Hotel & Spa along with Banyan Tree residences designed by Bill Bensley. We want to start construction later this year and open early 2017. It is a beachfront site and we are going mixed-use as there is demand for second homes.
In prosperous Ludhiana, we are starting construction this quarter on an Angsana Club & Spa for the many people who want a place to socialize, meet and splurge. This is the first planned club and spa in India on six acres overlooking a lake. The Banyan Tree branded club will have two restaurants, a library facility, an Olympic-size pool, a fitness center, and indoor-outdoor sports facilities.
We also have 220-unit, mixed-use managed service apartment project in Gurgaon where we are negotiating to select an operator. It is the condo-hotel model where we sell smaller-sized units, especially for non-resident Indians who stay for a few weeks and put it into a rental pool to create a higher yield and see capital appreciation.
We believe there is this extended-stay demand in India and there are many other cities to expand the model. We have been tracking this segment and want to raise a dedicated pool of capital as we believe there is a sweet spot in multiple cities with more than 1 million population and in micro-markets for 100- to 150-room hotels like this.
We will focus on this going forward and look for upmarket deals opportunistically. We think there is room for 50 to 100 of these midmarket hotels. Initially we want to do 20 to 25 properties and then plan our exit through an IPO, a REIT or sale of assets.
HOTELS: What is your take on the Indian marketplace and what are the challenges for hospitality developers?
Dugar: It is a cyclical business and when supply comes into the market as it has it takes time to stabilize. At the same time, all of India has fewer quality rooms than New York City or Shanghai, and mid- to long-term the market has strong potential across many segments.
There are several markets we won’t touch due to oversupply and certain segments and micro-markets are not attractive in the short-term. Our focus is on those markets and micro-markets where the mismatch in supply and demand is most evident. We chose Goa due to its steady growth and because it has become a year-round market.
We think we have an advantage in that we have already deployed significant capital by acquiring large tracks of land. To be successful in India, you must buy the best parcels and have timely execution. The returns on hotels can change if you are delayed two to three years. You need to execute in three years as opposed to five or six, which has often been the case. These two factors have huge implication on internal rate of return.