The Pantaloon group, India's largest retail group, was an early investor in real estate with a focus on shopping malls. This encouraged Pantaloon to launch Kshitij, a $80 million fund in early 2005 raised purely from domestic Indian investors. On the back of its success, it recently closed Horizon, a $350 million fund purely for international investors. We speak to Sameer Sain, CEO, PantaloonÆs financial services arm, Future Capital on what the firm's doing in the real estate space.

Kshitij is now fully committed û what kind of returns are you predicting?
Given that Kshitij is a development fund, we will only know the true returns when properties are completed and fully leased. All the malls are in different stages of development. However, I think we purchased land well and managed to get the timing right. On a pure NAV basis, I would estimate the current gain on the fund to be approximately 100%.

What lessons did you learn from Kshitij which you have incorporated in your second offering, Horizon?
We realised two things:

- Our core skill lies in identifying and intelligently purchasing land, having input on design and layout and eventually leasing. The rest, specifically the development and construction, is best left outsourced. This meant that we always partner with local developers. Compounded by the fact that the group at large will also be one of the end users of the space via our various retail formats, this enables us to get great dealflow and attract top notch local developers to work with us. Therefore, we are very focused on the partnering concept wherever possible.

- Whenever we bought land we did not buy enough. Our malls are/will become de facto destination sites and this has very positive effects on the general space around these destinations. Therefore, Horizon is acquiring larger tracts of land and, rather than just building a mall, we are building retail-led mixed-use developments that include residential, commercial and hotels.

What type of developments Is Horizon currently involved in?
Within Horizon we have committed to two transactions: in MumbaiÆs Kurla area and in Bangalore. Our research suggests that there is a dearth of ôfamily leisure destinationsö that combine shopping, eating, entertainment, living and working. We call this concept a Market City and are working closely with well known designers and architects such as Benoy and Rockwell to master-plan these sites.

In Kurla we have acquired a unique asset and are developing a 3 million square feet destination site that will combine a mall, commercial space, hotels and serviced apartments within a large landscaped environment in the heart of North Mumbai. The concept in Bangalore is similar.

The key factor here is that these Market Cities are in the heart of both Mumbai and Bangalore as opposed to city outskirts as we remain cognisant that infrastructure and transportation issues , we believe, are a long way from being adequate. The consumer has to be able to get to these destinations with relative ease. Other cities where we are exploring the Market City concept are Calcutta and Hyderabad.

What are your future plans in the real estate space?
We are planning a foray into hospitality, with hotels targeting Indian leisure and business travellers under the Future Hotels umbrella. There is a large opportunity for hotels in the three and four star price range as we fundamentally believe that there is a severe gap in the market for hotels built to suit the modern day Indian traveller. Most hotels that are built/are being built are typically five star, or end up being priced as one, simply because land is so expensive. Further û and contrary to commonly held belief û a lot of food and beverage within a hotel can drag down the operating margins and lead to space wastage.

Our model will be to focus on limited service and design-led hotels that will primarily be part of mixed-use developments and, wherever possible, will be attached to malls. We can provide shared services such as restaurants, parking, health clubs, etc. that are typically part of the mall and therefore maximize our productivity and space realisation. The top floor of a mall typically gets the lowest rents where as it is the inverse in a hotel. We can use this to our advantage.

Finally, this initiative will be led by Shishir Baijal, CEO and managing director of our real estate business and the person currently deploying the Horizon and Kshitij funds. Shishir is a veteran hotelier with over 18 years experience in the sector, including a long career at one of IndiaÆs leading hotel chains, the ITC group. Combining his experience with the embedded talent in his 70 person strong team, we believe we will be able to successfully execute this business.

How much do you plan to invest at the initial stage?
We seek to initially commit/deploy $250-300 million building 20-25 hotels within a two year time frame. We will look to increase the amount after this first round of deployment.

Will you get a partner for the hotels?
We strongly believe that building an asset and managing one are two very different skills. As we did when we partnered with CapitaLand to create IndiaÆs first professionally managed mall management business, we will look to partner with a strong operator to create a hotel management business. We also plan to separate the physical assets from the operating company and will be partnering with a couple of large financial investors/institutions on the property side.

There is a perception that real estate is IndiaÆs new bubble. What is your view?
To my mind a bubble is something that emerges from a demand-supply imbalance. Given that we are very consumer-focused, our entire mindset is very demand led. The real estate boom in India is a function of a thriving economy, rising income levels, access to credit and a younger, consumer-oriented population. This combined with relatively poor infrastructure and scarce resources may lead to an upward increase in prices until supply is able to keep up with the rising demand. While this may lead to short term dislocations and exuberance, it does not change the structural demand-led growth story. Sometimes, as may be the case currently, form may overtake substance, but I strongly believe that from a long-term perspective, we are in the right asset class in the right country.

What is your plan for the real estate mutual fund (REMF) space?
The current guidelines leave shades of ambiguity and we will await a clearer interpretation. While we are fundamentally excited about REMFs/REITs, we will only venture into this space when there is clarity on the actual format and the playing field is level for all participants. We believe it will be beneficial for all concerned when the average consumer can invest in an important asset class such as real estate. The majority of Indians have to invest their savings in equities and bank deposits as the debt market for retail investors is virtually non-existent. There is a huge requirement for not only yield-oriented asset classes, but also alternative asset classes so that the consumer can think intelligently about asset allocation.