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On Asia: Indian funds question value of AIM listing

December 24, 2007 11:23 IST

A few weeks ago, Trikona Trinity Capital, a fund listed on London's Alternative Investment Market that invests in Indian real estate projects, released what looked like a regular enough press update.

Trikona announced that it had sold stakes in four of its holdings in India to Germany's SachsenFonds, a unit of Sachsen, the German public sector bank, for about £32m.

But it was the next paragraph in the release that was more notable. The sale, Trikona said, meant it was the "first Aim-quoted fund focused on India to realise significant returns on some of its investments".

The statement hints at a point of growing frustration among India's five or six Aim-listed realty funds. Many of these are backed by blue-chip Indian developers and are investing in residential, mall, office and infrastructure projects, most of which are planned or in the early stages of construction.

Despite coming to market last year amid a barrage of publicity, many of the Aim funds are still trading at a discount to their net asset values and some are still trading below their initial public offering prices even as their peers that listed in India are enjoying the good times.

Trikona, a £250m fund, listed last year at 100p a share but last weekwas trading at about 93¼p.

Hirco, the investment vehicle of India's influential Hiranandani developer family, was the biggest of the funds with an IPO war chest of £363m. Yet it is trading at about 395p against its issue price of 500p.

Others, such as Ishaan Real Estate and Unitech Corporate Parks, which again are backed by Indian blue-chip developers, are trading above their listing prices but only marginally so despite their equally high pedigree.

This compares with rivals such as DLF, India's largest developer, which listed itself in India this year.

Since then, its share price has almost doubled and it is trading at a healthy premium to its net asset value.

It is just not fair, say the developers behind the Aim-listed funds. They offer numerous suggestions as to why their stocks are so far underperforming.

Aniruddha Joshi, executive vice-president of Hirco, says: "We are clearly concerned because we have a duty to our investors to make sure that they see a good return.

"But we are not concerned in the sense that the share price is not reflecting anything being wrong with the business," he adds.

Hirco says that it has invested 97 per cent of the funds it raised on Aim late last year, during which time its net asset value has increased by 29.5 per cent.

Similarly, Trikona says it realised a return of 108 per cent on the sale of the minority stakes to SF. It had held the stakes for periods ranging from nine to 14 months.

Some companies argue that their sluggish share price performance on Aim is due to factors ranging from a lack of brokerage research on their stocks to their becoming inadvertently linked to the UK's lacklustre real estate sector.

The other problem is liquidity. Indian developers were attracted to Aim because, by listing funds there that then invest in their projects, it allows them to raise money without diluting the ownership of their holding companies.

These sorts of listing also tend to attract long-term institutional investors, which the developers like because they are less whimsical than Indian retail punters. Long-term investors usually have a better understanding of the business case behind the funds, many of which are investing in projects that have gestation periods of seven years or more.

But long-term investors are also inclined not to trade as much, driving down liquidity and hurting share prices.

Some Aim-listed companies are now hoping that investors will begin to see a sort of arbitrage opportunity between their funds and their more expensive peers listed in India.

But Indian real estate specialists believe that the Aim-listed companies might have to wait for a while yet before new stock market investors will come knocking at their door.

They argue that many of the funds invested when Indian real estate valuations were very rich.

Since then, India's luxury residential market, earlier a target of speculators, has softened on rising interest rates and even the commercial property sector has lost a bit of its gloss.

In this environment, some analysts argue, selling equity stakes to pension funds, investment banks or others will not be enough to prop up valuations.

Investors want to see what prices the end users, such as homebuyers, will be willing to pay for the funds' developments.

And as many of these projects are still being built, that could take time.

Joe Leahy