Morgan Stanley arm shelves project with Wadhwa Group

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MUMBAI: The real estate fund of Morgan Stanley has abandoned plans to invest nearly $200 million (about Rs 1,240 crore) in an upcoming commercial real estate project in Mumbai after the rupee’s recent plunge against the dollar made the deal unrewarding , three people familiar with the development said.

Morgan Stanley Real Estate Fund was working on the structured finance deal with Mumbai based Wadhwa Group since January to invest in the latter’s 1.6 million square feet office project in Bandra-Kurla Complex. Construction on the project, called ONE BKC, is due to be completed in the next 12-15 months.

The fund has invested about $780 million in Indian real estate so far and the investment in ONE BKC would have been its first in a commercial property in Mumbai. “Returns that were arrived at in earlier negotiations between Morgan Stanley and Wadhwa were shrinking even before concluding the deal,” one of the people quoted earlier said. “The hedging cost for the entire deal would have been huge.”

Morgan Stanley declined to comment, but Wadhwa Group’s chief financial officer Srinivasan Gopalan confirmed that the proposed deal has fallen through. Gopalan, however, refused to speak on the company’s further fund raising plans.

The rupee has depreciated nearly 27% since April 1 and touched a record closing low of . 68.63 against the dollar on August 28. Another person quoted earlier said the Wadhwa Group is now raising domestic debt of over . 1,100 crore from Standard Chartered Bank for the project. The tenure of the debt is likely to be four years and the deal with the bank is expected to conclude in about a month, this person said.

Standard Chartered Bank refused to comment for this story. ONE BKC consists of two wings — wing A spread over 500,000 sq ft and wing B spread over 1 million sq ft. Under the proposed deal, Morgan Stanley Real Estate was expected to get control of the entire wing A. The developer has already sold half of wing B to buyers that include financial institutions, diamond merchants and companies.

One BKC offers office spaces from 1,000 sq ft to entire floors spread over 80,000 sq ft. While small spaces are aimed at professionals like lawyers and chartered accountants, the floors are meant for medium and large size occupiers. The rupee’s sharp depreciation against the dollar over the past few months has put many earlier offshore private equity investments in a bind. Investors have also turned cautious with transactions and negotiations for on returns, and deal structures are being postponed.

In the last two years, when most of private equity exits were being planned, the currency has slipped 46%. It has almost wiped out foreign private equity funds’ meagre returns from real estate and any exit now will lead to at least 25-30 % loss in dollar terms. Private equity investments in Indian real estate in the first half of 2013 fell 46% over the year-ago period to $276 million. Private equity funds had invested $514 million in the first half of 2012, according to a recent report from Cushman and Wakefield, an international property consulting firm.

Spanner in the Works

Realty arm of Morgan Stanley was to invest in Wadhwa’s 1.6 million sq ft office project in BKC The fund has invested $780 million in Indian real estate so far Construction on the project, called ONE BKC, was due to be completed in the next 12-15 months Wadhwa Group is now raising domestic debt of over 1,100 crore from StanChart for the project. The tenure of the debt is likely to be four years.

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