Where the rich are investing

Ten storeys above Worli Seaface in Mumbai is a good place to be — you get magnificent views of the city skyline as well as the sunset on the Arabian Sea. But that’s only if you can drag your eyes off the artworks adorning the walls of Ajay Piramal’s home. An Akbar Padamsee on one wall, a couple of Razas in shades of blue — Piramal and his wife, Swati, are known for their love of art and their home is the perfect setting for a collection built painstakingly over several years. The chairman of the Piramal group lives in the penthouse in the eponymous building that houses only members of the extended Piramal family. Hand-knotted carpets thrown casually across the massive living room, jade artefacts, teak and rosewood furniture and an exquisite reclining Buddha statue — the Eastern influences in this contemporary space are pronounced, yet subtle. 

There’s more than room here to entertain all the movers and shakers of India Inc but the Piramals now restrict their entertaining at Piramal House to the odd musical soiree. The more casual get-togethers happen a couple of miles out at sea, on a restored Arabian dhow named, Haveli of the Sea Horse, an 118-year-old wooden boat bought from a fisherman’s family in the Lakshadweep. A variety of cuisine, cocktails mixed by an expert barman, the gentle sway of the boat as it cruises along the Mumbai coast, little wonder that an invite to a Piramal supper-cruise is much prized — and an indication that you’re part of the right crowd. 

Piramal doesn’t like to speak about his wealth, but it’s the 800-pound gorilla in the room. In 2010, he sold Piramal Enterprises’ (formerly Piramal Healthcare) formulations business to Abbott for a staggering Rs.17,000 crore. Since then, the 57-year-old entrepreneur has invested in Vodafone and bought a health information-management company in the US. Those are business ventures. So, where does Piramal like to invest his personal wealth?

“For any entrepreneur, investing in his own company is always priority. But, having said that, I believe there are opportunities to make disproportionate returns by investing in stressed-out sectors such as real estate and infrastructure,” says Piramal, sitting back on a beige sofa in his living room. “I have never fancied fixed income as high inflation continues to erode returns.”

That’s the contrarian view. Given the dearth of must-buy opportunities in equities most of India’s very rich prefer parking a chunk of their money in debt. But some like Piramal are out seeking greener pastures.

Realty doesn’t bite

Although real estate prices in markets such as Mumbai have risen steadily post the 2008 crisis, Piramal believes the streamlining of regulations and laws around real estate has had a sobering effect on the market. “Earlier, developers used to get disproportionate floor space index through non-transparent means. Now, that is no longer the case as only those who follow the rules stand to get approval,” he points out. 

Piramal says he would have liked to take real estate exposure on the books of Piramal Enterprises — which has received Rs.4,400 crore in payments from Abbott thus far — but is wary of adverse shareholder response. “I believe the sector offers good opportunities, but we have not done any real estate investing through the company because of the huge negative perception that investors, in general, have towards the sector,” he says.

Instead, he is actively pursuing his “real” interests in his personal capacity. Last year, he bought a seven-acre land parcel next to Byculla zoo in the central part of Mumbai from the Mafatlals for a reported Rs.605 crore and recently, also outbid the Adanis and Anil Ambani to grab Gulita — the iconic Hindustan Unilever building a stone’s throw from Piramal House on Worli Seaface — for Rs.452 crore.

He isn’t the only one seeing value in real estate. Surgeon-turned-entrepreneur Naresh Trehan, too, believes realty is the asset class that professional, especially doctors, should invest in. “I have very limited understanding of equities and besides there is hardly any time in our profession to keep track of one’s investments. But that’s not the case with real estate as it is bound to give capital appreciation, provided you are buying the right property,” says the 66-year-old.

The cardiologist, who was the brain behind Delhi’s reputed Escorts Heart Institute and Research Centre and now Gurgaon’s Medanta Medicity, which clocks Rs.600 crore in revenues, adds a caveat — selection of the property is key. Buttressing his case, Trehan points out that way back in 1987, he invested Rs.1 crore in a plot in Maharani Bagh, the heart of posh south Delhi, to build a house; today, that property has appreciated “handsomely”. “I don’t want to quote numbers, but the fact is that investing in utility real estate will give you ample dividends.” 

That can’t be dismissed as typical Delhi style investing — traditionally, real estate scores over equities as an asset-class in north India.  Concurring with Trehan’s bullish outlook is Mumbai-based billionaire developer Niranjan Hiranandani. “My entire personal wealth is tied in real estate and barely 5% or so would be in stocks and related stuff. I started off with a capital of Rs.10 lakh and whatever I am today is because real estate as an asset class has really delivered,” says the 62-year-old, who jointly owns Hiranandani Constructions with his brother, Surendra.

Unlike other investors who tend to buy properties, as a developer, Hiranandani has been a land aggregator. In his personal capacity, Hiranandani has built a portfolio of land outside of the city — 30 acres in Ahmedabad, 77 acres in Pune, 70 acres in Nashik and 280 acres in Jaipur. “We are more opportunistic and seek longer term gain. I buy an asset cheap and sleep on it,” says Hiranandani. 

That strategy may well suit a developer — after all, he can always launch a project using that land — but Piramal cautions against investing in land outside city limits, where infrastructure development is yet to take place. “That’s a mistake people often make — investing in land at places where transportation infrastructure is practically absent. It’s a huge risk. When you are in the heart of the city, there is a possibility of fetching better returns,” he says. 

Ironically, even amid a glum economic outlook, real estate consultants say that there are a lot of HNIs keenly investing in commercial real estate. Shobhit Agarwal, managing director - capital markets, Jones Lang LaSalle India, says income yielding assets continue to be predominant theme. Although commercial rates in the island city have cooled on the back of increasing supply, the general view is that Mumbai is still king of the hill when it comes to commanding lease rentals.

Average commercial lease rental yields are about 10-12% a year, compared with 2-3% for residential units. In Q2FY13, though, the total supply in the market was 5.35 million sq ft (a 117% increase over the previous quarter) the average vacancy rate in Mumbai hovered around 20%. “If you compare all other cities, the possibility of getting a tenant is much higher in Mumbai, given that it remains the commercial capital of the country,” points out Agarwal. 

In fact, according to Cushman & Wakefield, the financial services sector accounted for nearly 30% of the total office space absorption of 2.23 million sq ft during the second quarter of the current fiscal. Perhaps, it’s not surprising then that Piramal says he is willing to bet his last buck on the city’s prospects. “Mumbai as a market will continue to be attractive and there is no doubt that prices will continue to rise,” he declares. It’s not without reason. 

According to a recent Knight Frank report, based on key drivers like employment and physical infrastructure, prices in the island city are expected to appreciate between 125% and 145% over the next four years compared with 91% to 98% gains in other cities such as Pune, Chennai and Bengaluru.

Investing in commercial realty isn’t only about land and office spaces. Another segment is also capturing investor attention –warehousing. India has a total warehousing space of about 1,800 million square feet (sq ft), of which only 8% (144 million sq ft) is in the organised sector. Of late, investors are looking at acquiring ready structures and sprucing them up before leasing them out. The lease rental for warehouses across the country is around Rs.12-15 sq/ft. The demand for organised warehousing space is estimated to grow to 476 million sq ft over the next couple of years. 

While real estate continues to be on the radar of most corporate chieftains, there are others who still believe in equity as an asset class – but primarily of their own group companies. 

All in the family… 

The wallpaper in Adi Godrej’s office is a sepia-toned, elaborate antique – perhaps Dutch— map of the world. The look of the room hasn’t changed much for the past 20 years or so; the map, the huge desk with neat stacks of papers and pens in holders have always been there, as have the neatly framed family photographs. Outside, the sitting area has had the same panelled oil painting featuring monkeys and goats, leather-backed sofas and a lion’s head chair that has shades of Renaissance Revival furniture. It’s all classic stuff that’s lasted a generation and will probably outlive us all – real heirloom material. The 70-year-old chairman of Godrej Industries, one of India’s oldest conglomerates, follows a conservative approach to wealth creation and preservation, one that abhors wasteful expenditure and believes in spending well, but wisely. 

That goes for the rest of the Godrej clan as well. All family members, who earn dividend income and remuneration, plough back all surplus funds into the company. Interestingly, barring funds for daily use, the family does not invest in bank deposits and instead parks part of its wealth as deposits in group companies.

All factions of the family continue to hold equal stakes in the holding company; all investment decisions are taken by a family counsel, which was formed in 2000 (when Godrej took over as group chairman) and comprises all family shareholders above 18 years of age. Members can’t increase their stakes independently: any purchase of company stock from the open market is done equally. The family currently holds 64% and 75%, respectively, in Godrej Consumer Products and Godrej Industries. 

“By and large we don’t invest outside of our group, except for a couple of family members who may have bought shares in some other companies,” says Godrej. “We have never relied on professional wealth managers for advice and we know that the best investment for us is our own group.” The diversified operations eliminate risk of concentration, unlike in a focused business such as infotech, he adds. 

A keen art lover and water sports enthusiast (he has a speedboat anchored near his house in Malabar Hill and water-skiing is a weekend must-do), Godrej invests in jewellery and homes for personal use. But that apart, he’s not a big fan of either bullion or real estate, perhaps because the group itself owns vast tracts of land (3,500 acres) at Vikhroli in suburban Mumbai and also has a realty development arm. “While equities in the short-term may not have delivered, over the long-term they definitely have outperformed other asset classes, including real estate,” says Godrej.

He explains with an example. In 1963, Godrej paid Rs.1 lakh to buy his first house, a 2,916-sq ft apartment at Usha Kiran, Carmichael Road, in tony South Mumbai; early last year, he sold it for Rs.25 crore. “On the face of it, it looks like a stupendous gain but the fact is, the appreciation is just around 20% CAGR,” he points out. “Now, after we demerged Godrej Consumer from Godrej Industries in 2001, in just 11 years, the CAGR in the share prices of Godrej Consumer and Godrej Industries has been upwards of 40% and 50%.”

Think that’s an old money view? Then, listen to Rana Kapoor, the 55-year-old founder of Yes Bank, a new generation, private sector financial institution. With a net worth of close to Rs.3,900 crore, Kapoor has all his fortunes tied up in his banking venture. “I don’t have any wealth advisors and have only one bank account — with Yes Bank, naturally,” says Kapoor.

Even his wife and three daughters — Radha, Raakhe and Roshini — have invested all their money in the bank, he adds. There’s a sound reason behind ploughing back all the money into the business — it sends a message to the employees that the founder believes in the institution he has created. “Instead of worrying about investments made outside your business, it is better to tie all your fortunes to what you have created,” says Kapoor, who wants Yes to be a $100 billion bank by 2020.

If Kapoor and the Godrej family’s attitude towards investing wealth is the norm, there are some notable exceptions. Consider Anu Aga and her daughter Meher Pudumjee, majority shareholders of the Rs.5,375 crore capital goods major, Thermax. Not only do they not plough the remuneration and dividend earned back into the company, Aga and Pudumjee are open to investing outside their group companies. “While we are conservative as a family, we review and adjust our allocation according to market conditions. We also invest in ‘value’ stocks — companies that demonstrate a robust business model backed by cash flows and good corporate governance,” says Aga.

The mother-daughter duo has formed a family office, headed by a professional, which looks at deploying the funds. “We hold quarterly meetings to review the performance of our portfolio,” adds Pudumjee, who identifies herself as a growth investor. The family also gives out a percentage of the dividend earned to social causes. “We believe in having enough wealth for our needs and a few luxuries, but not in indulgence that spoils our next generation. Hence, we have to contribute in some meaningful way to improve the lives of the deprived and marginalised,” adds Aga, who has retired from active management and is closely associated with NGOs, Teach for India and Akanksha.

Though the Agas follow an asset allocation model that incorporates the three major asset classes, they, like most other conservative business families, have not really explored the high-risk alternatives such as private equity, sports, arts etc. — and that’s where the action seems to be hotting up. 

The alternative

In 2000, Dr Reddy’s Laboratories bought out American Remedies, a Chennai-based proprietary concern that had pioneered the concept of nutraceuticals in India. 

Today, KR Krishna, the son of one of the co-founders, RK Ramanathan, has managed to build a sizeable fortune on the funds (around Rs.15 crore) that the family received. Krishna took advantage of Section 54EA of the Income-Tax Act that exempts from tax capital gains on transfer of long-term capital assets, if invested in a mutual fund for three years. “We used the dividends received from the MF units as seed capital,” says the 36-year-old who has since invested close to Rs.25 crore across a portfolio of seven companies.

He’s already made one successful exit: Fulcrum Venture, the fund run by Krishna, had invested Rs.5 crore in tranches between 2004 and 2006 in Casa Grande, a real estate project in Chennai. The promoters of the real estate company bought back the stake this year for Rs.50 crore, a good 10x return. This exit has now bolstered Krishna’s confidence and he is now looking at setting up a separate private equity fund with a corpus of Rs.120 crore. 

Within the alternative space, investment in sport franchisees, too, is catching the fancy of the super rich. Take the case of the Burman family, which owns Dabur but has handed over the management of the company to a professional CEO in 1998. Consequently, they do not draw remuneration from the company. Says 45-year-old Mohit Burman, one of the six family scions, “The Burmans have taken a conscious decision to invest their personal wealth outside of Dabur in businesses that one day will be bigger than the FMCG venture.”

Not surprisingly, over the following decade, the family invested a substantial portion of its wealth in the financial services space: in ABN Amro Securities, Fidelity Fund Management and Aviva Life Insurance, Universal Sompo, an AIM listed India-focused PE fund and recently picked up a 25% stake in a broking JV with Portugal’s Espírito Santo. But of late, the Burmans are investing in sports franchises as well: Kings XI Punjab (IPL team) and the Mumbai team of the upcoming Hockey India League. Is there an investment rationale behind buying a sports franchise?

No one’s quite sure, but that’s the advantage of being an high networth individual — they can afford to have the odd investment of passion go bust. Burman begs to differ though. “The decision to sponsor the teams goes beyond just putting my money where my heart is. The idea is to be part of a larger canvas, which will, in future, play a big role in finding new talent to play for the country.”

That gumption doesn’t extend to investing in art — not any more. Art was the “in” investment of the new millennium but it lost its form in the fall of 2008 when two major art funds, Osian Art Fund and Yatra, went belly up and investors ended up losing their entire principal; some are now seeking legal redressal. Having burnt their fingers once — badly — India’s wealthy are understandably wary of investing in the segment again.

Minal Vazirani, co-founder of Saffron Art, a leading online art and collectible auction house, explains the difficulty. “While there are some benchmark criteria to evaluate art (like the artist, the medium, the size among others), by far the most important one is the aesthetics involved. That’s very subjective and that’s where an experienced eye counts,” she says. 

The loss of faith in art as an investment hasn’t stopped the very wealthy from buying for pleasure or adding to their personal collections. For instance, RPG Enterprises chairman Harsh Goenka, who is known to have one of the most enviable private art collections in India, has never bought art for its financial worth. “My interest in art is driven by a passion for fine arts and not for investment purposes,” he states. Similarly, Godrej points out that though his company and family invests “quite a lot” in art, but the underlying consideration is never monetary.

In fact, it seems the ultra-wealthy don’t always seek alternatives that will give them the best returns. For them, it’s all about investing their money in pursuits that they are passionate about — be it art or their various businesses that made them super-rich in the first place.