TC1-0151

Rev. 8/20/2012

The Xander Group and the Chennai

Warehouse
“Buying a fully leased warehouse should be simple,” Sid Yog, Co-founder and Managing
Partner of the Xander Group explained. “But in India, no real estate deal is ever simple.”

The acquisition currently being negotiated is a recently completed 130,783 square foot
warehouse facility leased to DHL for five years with two five year options. In addition to
this warehouse, the developer, Vijay Ralhan owns 25 acres of adjoining, fully permitted land
in an industrial park in Chennai, India where he plans to build another 544,500 square feet of
modern, warehouse space. The 25-acre expansion is part of a larger 240-acre industrial park.
So rather than simply purchasing the completed building, Yog hoped to structure an
investment where the Xander Group can also purchase these future warehouses on favorable
terms.

In these negotiations, Yog benefited from a dramatic change in the Indian real estate market.
“Of the 160 investment funds that were created since 2005 to enable foreign investors to
invest in real estate in India,” Yog explained, “The Xander Group was one of only four that
was currently active and investing.” (See Exhibit 1 showing Foreign Direct Investment in
real estate in India). It is also one of the few firms that is interested in investing in
warehouses, as opposed to more traditional, institutional investments like office buildings
and residential properties.

“When there is limited competition,” Yog stated, “it puts you in a powerful position.
However it makes you question why no one else is interested in this sector.” Part of the
answer, Yog suspected, was the slower growth in India’s economy. As the New York Times
reported on May 31, 2012:

“The latest growth numbers signal India’s deteriorating prospects and presage much work to
come as industrial output has stalled and investment is falling” said Eswar Prasad, an
economist at Brookings Institution and Cornell. “These numbers reflect not just a loss of
economic momentum but, far worse, a loss of confidence in the government’s ability to
tackle the enormous short-term and long-term challenges of sustaining growth.”

Investing in India

From a broad, macro perspective, India’s real estate market seems quite promising.
According to V.S. Rangan, Executive Director of India’s Housing Development Finance
Corporation, India will be a US $2 trillion economy by 2014 and a US $4 trillion economy
by 2020. It is the second fastest growing, large economy after China, with a rapidly growing

This case was written by John H. Vogel, Jr., Adjunct Professor, Tuck School of Business at Dartmouth. Some numbers have been disguised or changed. It cannot be used

or reproduced without the express written consent of the author or the Xander Group. For permission to reprint contact the Tuck School of Business.

© 2012 Trustees of Dartmouth College. All rights reserved.

The Xander Group and the Chennai Warehouse TC1-0151

middle class and increasing urbanization. Between 2007 and 2021 the percentage of people
living in urban areas in India is projected to increase from 30% to 45%. This means that over
150 million people or over 10 million people per year will need to find housing in India’s
urban areas.

Because of this great demand for housing, most Indian real estate developers and foreign
investors have concentrated their investments on residential real estate. From 2006 to 2008,
buyers of residential properties did exceptionally well. For example, there were lots of
stories about people like an investor in Bangalore whose residential condominium increased
in value in a couple of years from 1,500 rupees per square foot to 8,500 rupees per square
foot. Land values did even better, in many instances, often tripling or quadrupling in as little
as a year. Developers jumped on this trend supported by the public markets which fully
embraced the great Indian ‘land bank’ story.

As the Ressex index of residential properties in Mumbai indicates, except for a slight
downturn in 2009, the price of residential property has increased every year since 2006.
Ressex Index of Housing Prices in Mumbai

50
45
40
35
30
25 PriceIndex
20
InventoryIndex
15
10
5
0
Jan May Nov Nov Jun Dec Jun Dec Jun Dec
05 06 07 08 09 09 10 10 11 11

The commercial real estate market also benefited from the booming Indian and world
economy. However, 80% of the real estate funds flowed into residential development and
with fewer active buyers, commercial properties did not experience as much appreciation.

During this run-up in residential pricing, Professor Arthur Segel, the Poorvu Family
Professor of Real Estate at Harvard Business School, observed that investors in the real
estate market in India might be underestimating some significant risks. “To achieve its full
potential,” Segel explained, “India must still overcome some major challenges. These
challenges include a lack of roads, power and clean water, a high level of illiteracy, and

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increased social friction.” Segel was also concerned about “the lack of ‘soft infrastructure’
including an inadequate supply of knowledgeable lawyers, accountants, contractors and sub-
contractors.” He worried about public corruption and the legal system, which was “founded
on solid principles and still considered an honest broker in an often compromised landscape,
but is cumbersome, difficult to negotiate and time consuming.” (See Exhibit 2).

The DHL Warehouse Site

In 2005, Vijay Ralhan began acquiring land in the JMD Industrial Park in the Sriperumbudur
area just outside of Chennai. Over the next five years he purchased a total of 32 acres in this
240 acre industrial park. Ralhan began developing his first warehouse in 2010 on 7.3 acres
of land and leased it to DHL. DHL moved in and started paying rent in July 2011.

The JMD Industrial Park is approximately 5 kilometers from National Highway 4 which is
one of the major north south highways in India. To get to Highway 4, trucks travel on a
twenty meter wide state highway. To drive the 50 kilometers from the site to the Chennai
Airport takes approximately 75-90 minutes.

In 2008 the JMD Industrial Park was among the first industrial parks in India to obtain
approvals and be designated a Free Trade and Warehousing Zone under the Special
Economic Zone Act. By providing tax incentives, the government expects these Free Trade
and Warehousing Zones to facilitate international trade much as the Special Economic Zones
have done in China. Among the benefits of being in a Free Trade and Warehousing Zone
(FTWZ) are:

• Income tax and service tax exemptions reduce logistics costs for the users.

• Shipments from the ports and airports to the FTWZ do not have to pay customs
assessments and take less time getting through customs.

• 100% Foreign Direct Investment is permitted.

Chennai

Chennai is located in Southern India and is the capital city of the state of Tamil Nadu.
Chennai is home to 8.9 million residents making it the fourth most populous metropolitan
area in the country. Its port on the Bay of Bengal is the second busiest container port in
India.

Chennai boast a large industrial base. 30% of India’s automobile industry is located near
Chennai. Automobile manufacturers include Hyundai, Ford, BMW and Nissan. Other
manufacturing companies include Caterpillar, Delphi and Ashok Leyland. 50% of India’s
leather exports come from Chennai as well as significant exports of apparel and footwear.

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Industrial Clusters Around Chennai

Chennai has also emerged as a major IT hub and is currently the third largest exporter of
IT/ITES in India. Major companies like Accenture, Verizon, Infosys, TCS, Cognizant,
Microsoft and many others have located in Chennai, along with electronics companies such
as Nokia, Siemens, Motorola and Samsung.

The Indian Warehouse Market

In India it is very hard to get reliable data about most types of real estate. On the commercial
side, as shown in Exhibit 3, demand for office space was strong from 2004 to 2008. In mid-
2008, the global financial crisis caused demand for office space to drop, and since then
supply has significantly outstripped demand in most major cities in India.

In terms of the market for warehouse space, only a very small percentage of warehousing
needs are currently being met by modern warehouses like the DHL warehouse. Of the 1.8
billion square feet of warehouse space in India, most of it is concentrated in small “mom and
pop” warehouses, government warehouses and company owned warehouses. Modern,
privately owned warehouses total about 144 million square feet or about 8% of the market.
According to Yog, “only about 7 million square feet of warehouse space in India reaches
‘international’ quality like the DHL warehouse.”

What will be the future demand for modern warehouse space in India? With so many
changes going on in India, experts have widely divergent views. What they agree about is

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that the key drivers of demand will be growth in the manufacturing and retail sector. Other
important factors will be international trade and the increased utilization of large, bulk,
shipping containers.

“Warehousing is part of the logistics, supply chain,” Yog observed. “India’s highways are
already close to capacity. Will bottlenecks on the highways and other infrastructure issues
push companies toward fewer large warehouses or multiple small warehouses?” he
wondered.

As shown on the map below and as part of its due diligence, The Xander Group identified 22
industrial parks near Chennai where leasing has taken place during the last year. Leases
ranged from 12,500 to 400,000 square feet with most of the leases in the 20,000 to 55,000
square foot range. The DHL lease was the second largest. In total 1.3 million square feet
was leased.

Yog noted that JMD industrial park was the only one in Chennai that was in a Free Trade
and Warehousing Zone. He also observed that most of these industrial parks were less than
50% built out. For example in the seven parks closest to the JMD industrial park, 2.6 million
square feet is occupied, but another 3.3 million square feet is zoned and approved for
development.

Location of Recent Warehouse Leases

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The Product

On the 7.3 acres, Vijay Ralhan built a modern warehouse with 13 meter clear height. It has a
Ridge and Turbo ventilating system that changes the air six times per hour and reduces
temperature inside the warehouse by 4-6 degrees Celsius. There is covered parking for 12
cars, 50 motorcycles and 100 bicycles. DHL has invested about 100 million rupees to
customize the facility for its operations including a seven level racking system. (See pictures
in Exhibit 4 and selected warehouse specifications in Exhibit 5.)

DHL pays for both the 130,783 square feet of leasable space inside the warehouse plus
26,910 square feet of open storage space outside the warehouse. The rental rates are 20
rupees per square foot per month for interior space in the warehouse and 4.5 rupees per
square foot per month for the open storage space. Other key terms of the lease included the
following:

Basic Lease Term (lock in period) 5 years

Options (2 , 5 year options) 10 additional years

Escalation in rent on the warehouse 15% every 3 years

Escalation in rent on the open yard 5% every 5 years

Maintenance charge first year 3% of the rent

Maintenance charge the second year 4% of the rent

Maintenance charge thereafter 5% of the rent

Real estate taxes, utilities, etc. Paid by the Tenant

Basic Set-Up

(Rupees in thousands: $1=55 Rupees)

Base Rent: Warehouse (130,783 sf * 20 rs/sf*12 months) 31,388

Base Rent: Open Storage (26,910 sf *4.5 rs/sf*12 months) 1,453

Maintenance Charge (3%) 985

Sub-total 33,826

Vacancy (2%) (676)

Effective Gross Income 33,148

Operating Expense (985)

Net Operating Income (NOI) 32,163

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The Players:

Vijay Ralhan has 25 years of experience as a trader in leather and allied goods. The DHL
warehouse is his first large venture as a real estate developer. He is a prominent resident of
Chennai and President of the Tamil Nadu Association of SEZ Infrastructure developers. As
an entrepreneur, he saw a great opportunity to purchase land in the JMD Industrial Park,
which became considerably more valuable in 2008 when it became a Free Trade and
Warehousing Zone.

Siddharth Yog

Sid Yog co-founded Xander in 2005. As Managing Partner, he is responsible for overseeing
all of Xander’s investments. Yog has been involved in global real estate and infrastructure
since 1993. From 1994 to 1998, he helped set up CB Richard Ellis’ India operations and led
their consulting, valuation and research groups. From 1999 to 2002, he was the Director of
CB Richard Ellis’ Asia/Pacific strategic consulting practice.

Yog received an MBA from the Harvard Business School with highest distinction and was
elected President of his Harvard Business School Class. After graduation, Yog was offered
an opportunity to set up a real estate private equity business for JP Morgan Chase in Asia.
While pondering this opportunity, he ran into his HBS real estate professor, Arthur Segel,
who happened to be in New Delhi attending an investment conference. Segel suggested that
instead of JP Morgan Chase, Yog should start his own investment firm. The result was The
Xander Group.

Over the past seven years, the Xander Group has grown to 85-plus employees with offices in
New Delhi, Singapore, London, Boston, Mauritius, Bangalore and Mumbai. Yog was
profiled by CNBC in 2004 as a "Young Turk". In 2006, he was voted by Private Equity Real
Estate magazine as one of 20 global stars of the future.

(Please click on http://video.cnbc.com/gallery/?video=3000101601&play=1 where you can

watch a recent video of Sid Yog being interviewed on CNBC about current investment
opportunities in India. I will also try to put this 10 minute video in the course folder.)

Xander

The Xander Group Inc. is an institutional investment firm focused on long term, value
investing. It started in 2005 when India finally allowed foreign direct investment in real
estate. Over the last seven years it has raised four opportunistic funds, a specialty retail fund
and a managed account for a large pension fund. To date it has invested $1.8 billion.

Each of its funds has been oversubscribed, but Xander has not increased the amount of
money it will accept in any particular fund. According to the Xander web site its “portfolio
comprises over 50 million square feet of real estate and infrastructure assets, which include
residential buildings and integrated townships, group housing, office complexes, large
format retail centers and lifestyle destinations, neighborhood shopping centers, urban mixed-
use projects, and industrial facilities; 1,850 hotel keys; and 950 kilometers of toll roads.”
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DHL

Deutsche Post DHL, describes itself as “the world’s leading postal and logistics group.” In
2011, its EBIT climbed to €2.44 billion. “In recent years, we succeeded in positioning
ourselves exceptionally well in the global growth markets and laid the foundation for
continued profitable growth into the future,” Deutsche Post DHL CEO Frank Appel told
analysts and investors in London in May 2012. “We have stabilized earnings in the MAIL
division and are now capitalizing on the tremendous growth opportunities at DHL.” The
May press release about the company’s earnings goes on to say: “In the DHL divisions, the
top priority in coming years is to take even greater advantage of the company’s unique
global presence in order to further enhance revenues and profit. Over the past two years, all
three logistics divisions have achieved significant growth in revenues and have boosted their
profitability. To continue this positive trend, the Group is placing a special emphasis on
taking advantage of targeted growth opportunities in the particularly dynamic growth
BRICM-countries – Brazil, Russia, India, China and Mexico.”

According to the news agency, Press Trust of India, DHL has invested over US $300 million
in India. In explaining the investment in the warehouse in Chennai, DHL said that it would
cater to multiple industries including automobile, engineering and manufacturing, fashion
and apparel.

"Given the easy accessibility to Ports and to Airports, the facility will provide distribution
management and trading, both in and out of India (for us)," Logistics Chief Executive
Officer Christoph Remund told reporters.

According to DHL company officials, the Indian logistics market had revenues of $75.19
billion in 2009 and is expected to reach $120.42 billion in 2014. In India, DHL functions as
a third party logistics provider or a 3PL11.
The Government

In India, the government plays a very large role in the real estate market. As is the case in
most countries, the Federal, State and Municipal governments are large land owners,
regulate land use, set tax policy and enforce building codes. In addition in India, in recent
years, the Federal Government has gotten heavily involved in two areas that have or could
have a significant impact on the real estate market: regulating foreign ownership of real
estate and simplifying tax policy across different states.

1
According to Wikipedia, “A third-party logistics provider (abbreviated 3PL, or sometimes TPL) is a firm that provides service
to its customers of outsourced (or "third party") logistics services for part, or all of their supply chain management functions.
Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be
scaled and customized to customers' needs based on market conditions and the demands and delivery service requirements for
their products and materials. Often, these services go beyond logistics and included value-added services related to the
production or procurement of goods, i.e., services that integrate parts of the supply chain.”

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In 2005, when the Indian Government first allowed direct foreign investment in real estate, it
had two goals in mind: creating jobs and growing foreign exchange reserves. To spur job
growth, India only allows foreign investors to invest in new buildings where there are
construction jobs. The Indian Government also insists on a minimum direct foreign
investment of $10 million or $5 million in a joint venture.

In terms of currency concerns, India wants to avoid the kind of problems Thailand
experienced in 1998. “The massive outflows of capital from investors selling their real
estate,” according to Rohan Skiri, a Partner at Xander Investment Management, “caused a
dramatic decline in the Thai Baht.” So India requires foreign real estate investors to keep
their principal investment in properties in India, and not repatriate that money, for a
minimum of three years.

In terms of tax policy, one of the issues that has hurt the Indian economy has been the
proliferation of indirect taxes, particularly at the state level. Depending on the state, a
company may encounter an entry tax, stamp duty, telecom licence fees, turnover tax, tax on
consumption or sale of electricity, taxes on transportation of goods and services, et cetera. It
is as if a company had to pay a tax for shipping goods from its factory in North Carolina to
its warehouse in South Carolina. In 2009, the minister of finance recommended that India
adopt a single, uniform Goods and Service Tax (GST) as a way to integrate State economies
and boost overall growth. This value added tax would provide revenue to both the central
government and the states and would only be collected at the final point of sale. Finance
Minister Pranab Mukherjee hoped the GST system would commence in April 2010.
Implementation has been delayed and the new target date is April 2013.
Pricing the DHL Warehouse

As Yog thought about what he should offer for the DHL warehouse, he discovered that there
were no comparable, recent sales to guide his analysis. Four or five years ago, Ralhan would
probably have been able to sell this property at about an 11% cap rate or 292 million rupees.
With no one besides the Xander Group interested in acquiring this property, and with the
great uncertainty surrounding the Indian real estate market, Yog was sure he could get a
better price. How far should he push on the price? How should he balance the acquisition of
this single asset against his desire to acquire the next group of warehouses Ralhan would
develop?

Analyzing the deal from Ralhan’s perspective, Yog tried to figure out his motivation for
selling. He believed that Ralhan was more interested in making his profits from developing
warehouses rather than as a long term owner of real estate. Yog also assumed that with
limited availability of debt in the market, Ralhan probably had so much money tied up in the
DHL warehouse that he would not be able to develop future properties on the remaining 25
acres unless he sold this warehouse.

Without good sales comparables to guide him, Yog asked the Xander staff to calculate the
replacement cost. In other words, what would it cost a developer in 2012, to purchase the
land, build the warehouse and lease it to a single tenant? In doing this calculation the Xander
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team focused on the seven major, cost categories: land costs, steel costs, roof and wall
construction, windows and doors, civil work (road construction and utilities), financing costs
and leasing costs. They estimated the reproduction cost at about 270 million rupees. The
Xander Group always calculated the reproduction costs carefully in all their investments, and
even with a new building, they strive to pay an amount below reproduction cost so that they
have pricing power against future competitors. Yog also believed that Ralhan’s costs were
considerably less than 270 million rupees because he had purchased the land at such
favorable prices.

Next, Yog asked the staff to build a model assuming that this warehouse sold in five years.
Because there would be an escalation in the rent after year three, the model assumed the NOI
would be higher when The Xander Group sold the property. Not knowing what the market
would be like in five years, Yog asked his assistant to do two scenarios, one assuming a cap
rate on sale of 10% and a second one assuming a cap rate on sale of 12%.

The Xander Group’s minimum target in its real estate investments is a 20% Internal Rate of
Return on an unleveraged, pre-tax basis. However, Yog wondered whether that was an
appropriate target in this case. In the United States industrial properties often provide
stability to a portfolio because of their consistent cash flow, especially in a portfolio like the
one The Xander Group usually put together with a variety of property types including a
number of hotels. On the other hand, the warehouse market in India was much less
developed than in the United States.

Pricing and Structuring the Option

From the beginning of their negotiation, Yog made clear that he was interested in more than
just purchasing a single warehouse. He thought that over the next five years, Ralhan might
be able to develop another four warehouses, similar to the DHL warehouse on the 25 acres
he owned in the JMD Industrial Park.

How should The Xander Group and Ralhan structure this part of the deal so that Ralhan had
the right incentives and Xander received a favorable price on future warehouses? In
particular, Yog tried to figure out the answers to the following four issues:

1. How much, if any, preleasing would be required before Ralhan was allowed to start
construction of the next warehouse?

2. What obligation, if any, would Xander have to purchase future warehouse

properties? How long would they have to decide and what would be the trigger point
to force a decision?

3. What formula would they use to determine the sales price? (Yog felt it was critical
that this be worked out in advance.)

4. What kind of due diligence process would be fair to both parties? For example, the
Xander Group wanted to be sure future warehouses were well built, but Ralhan did

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not want to be saddled with extra costs based on quality standards that were out of
line with the market.

As in any partnership, if everything went as planned, The Xander Group and Ralhan would
both do well. But in real estate investments, things rarely went as planned and Yog wanted
to make sure that the deal for future development was structured simply and clearly, but had
enough flexibility so that everything would not have to be renegotiated if the real estate
market changed.

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Study Questions:
1. What are the key risks? How can Yog mitigate those risks?

2. How much would you offer for the DHL warehouse? What kind of a return will the
property generate if sold after five years on a pre-tax, unleveraged basis?

3. How would you structure the investment for the next 25 acres in a manner in which
incentives for Ralhan and Xander are aligned?

4. Why do you think that Xander continues to be successful when so many other funds
and investment firms have failed?

5. Based on the specifications and other characteristics how is a modern warehouse in

India different than a modern US warehouse like the one described in the Shady
Trail case?

6. What kind of split of the profits is appropriate between Xander and its institutional
investors? Should it be different than the normal split between institutional investors
and their advisors in developing countries?

7. Is this a good time to invest in India? Is warehousing the right place to invest?

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Exhibit 1: Foreign Direct Investment in Real Estate in India

A Crore Rupee equals 10 million Rupees.

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Exhibit 2: Excerpts from the article:

“Desperate times in realty leading to

unprecedented restructuring-I, II & III”
Track2Realty, Posted July 6 and 8, 2012

By: Ravi Sinha

During the boom, many developers dreamed of transforming the urban landscape with
millions of square feet of homes, offices and malls and set off on an aggressive expansion
financed with debt that at 6 percent interest was cheap by Indian standards.

The learning in the last four years has made most of the leading players restructure their
project portfolio. The leading players have refocused on their core expertise area and selling
land banks.

With sales nose diving, debt piling up and share prices way below the listed price, real estate
companies have started trimming their workforce. A leading realty company told
Track2Realty that with no major headway on fresh projects and debt piling up as sales
falter, the heat is mainly on the marketing and sales teams. In 2011, home sales in the
financial hub of Mumbai fell 45 percent from a year earlier while sales in the New Delhi
region were down 20 percent.

Many consultants agree that real estate developers have been under pressure for the past
year. Funding for the industry has almost dried up, high interest rates have dampened sales
and debt-servicing costs are inching up.

Marketing gurus of realty sector who made fortunes during the hey days are baffled. Projects
are stuck and millions of square feet remain unsold, forcing developers to hire a second set
of CEOs to handle more work and fund managers who can sell off excess land-banks .

The big question remains—despite the desperate times leading to unprecedented

restructuring, will the crisis be over any time soon?

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Exhibit 3: Office Market Absorption Trends

Note: Figures are representative of India’s seven metropolitan cities – NCR-Delhi, Mumbai, Bangalore, Chennai, Hyderabad,
Kolkata and Pune. (Bangalore is now officially called Bengaluru.)
Absorption Rate of a quarter is the ratio of net absorption during that quarter and available stock (which is vacant stock at the
beginning of the quarter + new completions during the quarter).

Source: Jones, Lang, LaSalle and Macquarie Research.

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Exhibit 4: Pictures of the DHL Warehouse

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Exhibit 5: Selected Warehouse Specifications

Size 90 x 135 meters. Rectangular. 130, 783 sq. ft.

Eve Height 13 meters

Loading Docks 6 on one side with 6 electrical dock levelers. Dock doors
are 1.2 meters above the finished ground level.

Natural Lighting—Roof area 5% of roof area with polycarbonate sheet day lighting
panel.

Flooring Point Load—Seven (7) tons per square meter

Metal trowel smooth with suitable hardeners.

Bay Size 15 meter center to center internal column spacing

Compound Wall 2 meters of pre-fabricated wall panels plus 0.6 meter

barbed wire fencing.

Racking Specifications Ground and 7 level racking with 2 pallets per level

Average weight per pallet 1000 kg

Surface hardness—minimum 5 on the Mohr scale

Covered Parking 12 Cars, 50 Motor Cycles, 100 Bicycles

Non-Covered Parking 7—40 Ft. containers, 20—20 Ft containers

Canteen Facility 50 square meters including kitchen

Electrical 11 KV, 3 phase, 3 wire system

Fire Alarm System Smoke detectors and fire alarm system control in the
security room.

Fire Hydrant System 17 ground hydrants, 3 internal hydrants

One electrically driven pump and one diesel standby

pump

100,000 liter underground reservoir

Landscaping Provide aesthetically nice environment with adequate

green area.

Perimeter storm water drains and cut off drains to

prevent flooding.

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