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Carlyle Plans India, Japan Property Deals

The Carlyle Group hopes to seal its first property deal in India this year and is buying homes for the elderly in Japan, as the private equity firm's real estate arm looks to make inroads in Asia.

In an interview, Jason Lee, Carlyle's head of Asia property investment, also said he would consider buying out underperforming real estate investment trusts (REITs) in Japan and taking stakes in Chinese and Indian developers.

With about $410 million of equity already in Chinese and Japanese property, Carlyle is turning to India's thriving economy -- first partnering with developers on projects, with second-tier cities such as Chennai, Pune and Hyderabad favored.

"We're working on a number of investments we hope will close," Lee told Reuters. "Our strategy is really to focus on strategic partnerships, firstly and foremost."

Like most foreign investors, Lee is keen to help fill India's estimated shortfall of 20 million homes. Internal rates of return on development are typically 20-30%, and cash is easily regenerated through home sales.

Owning office blocks or malls is riskier in the immature property market because they can be difficult to sell.

India's property industry has been buzzing since rules on inbound investment in the construction industry were eased in early 2005, prompting an influx of private equity funds such as those run by Morgan Stanley and Citigroup .

Property prices in major cities have doubled in the last two years, but have cooled in the last couple of months because the soaring market and rising interest rates started to pinch even the most upwardly mobile of India's growing middle class.

"In Mumbai, New Delhi and Bangalore, sure, there's a general concern about pricing," Lee said. "But when you move out to places like Pune, Hyderabad, Chennai ... all these cities have great potential."

Greying Japan

In Japan, Carlyle is eschewing expensive Tokyo but hoping to tap growing demand for "senior housing" among a fast-ageing population by partnering with a unit of Tokio Marine & Nichido Fire Insurance in a joint venture that will buy and refurbish buildings for senior housing.

Tokio Marine is a unit of Millea Holdings. Lee said the first deal in a 18- to 24-month acquisition program would come "within the next several weeks," with the portfolio likely to be finally worth $500 million.

"We're looking at the demographics and trying to get into emerging sectors, where we think there's tremendous growth," Lee said.

Some estimates show Japan will have one person over 65 to every two of working age by 2025, a higher dependency ratio than any other major industrialized country. Now pensioners make up nearly a quarter of the 127 million population, and over-50s hold 75% of Japan's individual wealth.

Carlyle, which has spent $170 million to build up a portfolio of shopping centers in Japan with asset management firm S.O.W., would also consider buying Japanese REITs and taking them private.

Japan's $40 billion property trust market has ended a five-year bull run with a steep fall. Several REITs are down more than 20% in the last month, and around half of the 41 trusts now trading at a discount to net asset value -- with residential portfolios doing particularly badly.

"We believe this is one area of opportunity in the near future," Lee said.

He added that non-recourse loans were easily available and only "marginally" more expensive in Japan since the U.S. subprime crisis sparked a credit crunch in many global markets.

In a strategy also employed by Morgan Stanley's property arm, Carlyle is looking to take equity stakes in ambitious developers in China and India, once it develops a good partnership on individual projects.

In China, the company has five investments and is looking to partner with developers in building more housing in secondary cities. For example, Carlyle recently partnered with a local developer called Capland Property Development Group in Qingdao.

"Once we partner with a developer and the partnership proves to be a win-win, then it could lead to an entity-level investment to help the company grow and potentially go public," Lee said.