Q&A: Milestone Capital Advisors' Rubi Arya

Q: It is more than a year since you decided against selling the business. What has Milestone been doing?

A: The primary focus has been on making exits from our early-vintage funds. Milestone was formed in 2007 and the earliest funds closed in 2008. We felt that in order to continue building this organization it was important to show full-cycle capability. We were able to return $250 million out of the total corpus of $850 million, with a mid-to-high teens IRR. The market has been challenging but I inherited a good set of investments. There were also some funds that closed after the promoter passed away and had yet to make any draw-downs, so we focused on investing the money. We invested nearly $100 million.

Q: Milestone's real estate investments range from greenfield residential development to yield-generating commercial assets. What have returns been like?

A: We have a diversified portfolio because we believe we need be present in a range of areas - it's a question of risk-reward. At the land level, where the approvals come, you can get returns of 25-30%; at the construction level it is 20-25%; and then for ready assets it is 12-14%. We have always been cautiously optimistic and are happy to give returns in the mid-to-high teens.

Q: What are your future fundraising plans?

A: We intend to go back to the market with a new fund in early 2014. It will be core assets - we believe there are opportunities because the commercial market is pretty much at a low and can only go up from here. We will probably focus on commercial ready assets, mainly office buildings, and we will be looking to raise INR4-5 billion ($64-80 million), with the option of another INR2 billion.

Q: Do you anticipate any changes in the investor base?

A: Milestone was the first real estate fund house in India that allowed retail participation, including family offices and high net worth individuals (HNWIs). Our average ticket size was INR2.5 million. We have a huge investor base - 16,000 retail investors - and strong distribution channels. Most our funds have been raised from domestic investors so we haven't been hit so much by the foreign exchange volatility of the last year. Having said that, there is a lot of appetite from foreign investors for what India offers in terms of mid- to long-term wealth creation. We find that a lot of Asian investors are interested in deploying capital, and so we expect to reach out more to family offices and HNWIs, and then to sovereign wealth funds and pension funds.

Q: India has issued draft guidelines for real estate investment trusts (REITs). What does this mean for your rental yield funds with IL&FS?

A: The first fund launched in 2008, the same year the first draft regulations for REITs in India came out. We anticipated REITs would become a reality in 2-3 years but it has taken a lot longer. Now we have seen the second draft guidelines and more tweaking needs to be done. For example, the guidelines are silent as to whether or not foreign direct investment is permitted in REITs. Then there are the taxation and valuation aspects. All this needs to be clarified but we feel that REITs will become a reality very soon, which means more transparency and liquidity for investors. The minimum amount of assets required to list as a REIT is INR10 billion and not many fund houses have that size, but we already have INR15 billion and they are more than 90% leased out, so they qualify.

Q: What are your expectations for residential real estate?

A: There is an overhang of supply in the residential market and some cities have huge amounts of inventory and it's not tenable. We expect prices to correct by 10-12%, but the consumption and urbanization story is still there. We see huge demand for middle income housing with a ticket size of INR10-15 million. At the right price, there will always be demand.

Q: You went through a traumatic experience and could have walked away from Milestone. Why did you decide to stay?

A: I didn't come from this industry and there were people who warned me about the fiduciary responsibilities, that this was a big business with $1 billion in assets, that the industry is full of sharks. My first instinct was to sell and that's what we tried to do - but in hindsight I shouldn't have been so hasty. I started to understand what was going on and I realized what Ved had built was actually more meaningful. He set up so many vehicles - we have a non-banking finance company license, a housing finance license, a debenture trustee license - that needed to be shown more light. And then the team was still there supporting me; we enjoyed the goodwill of our investors; the distributors were backing us; and we had some good developers. So I took a leap of faith and I am happy with the decision.

Q: Milestone has sold off a couple of non-core businesses. Do you plan to remain a pure-play real estate investor?

A: For now we will remain real estate-focused, but I want to grow the NBFC and the debenture trustee businesses. Work has already begun on that. We will start with real estate investing because we are familiar with that area.

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