MUMBAI: The value of private equity transactions in the country's real estate sector surged 26% year-on-year in the nine months to September, indicating that PE investors remain bullish on the sector, particularly the commercial segment, despite weak sales and rising inventories.
According to a report by realty consultant Cushman & Wakefield, the value of PE transactions announced in the sector rose to Rs 4,700 crore between January and September 2013.
The surge was primarily due to a rise in investments in leased income-generating office properties by institutional investors like Blackstone Group, the report said.
Total investments in office space during the period rose to Rs 2,476 crore, or $397 million, which is more than double of the investments made in the same period of 2011 and 2012, the report showed.
"There is a clear preference for investments in leased office spaces with over Rs 7,667 crore invested in the segment since 2011," said Sanjay Dutt, executive managing director, South Asia at Cushman & Wakefield.
Dutt said he expects the number of deals and investments in commercial sector to increase from here.
"With improving sentiments, deal momentum in the realty sector is expected to increase in the coming year. REITs (real estate investment trusts) seem to be a possibility soon and that has propped optimism among developers and even funds that will be able to offload some of their assets and get exits. This availability of exit mechanism is expected to boost investment activity in commercial realty," Dutt said.
Many funds are finding these deals attractive and are looking to either acquire on their own or enter into an alliance to do so, latest being Canada Pension Plan Investment Board (CPPIB). The $200-million alliance between CPPIB and Shapoorji Pallonji Group, which was announced last week, is also eyeing opportunities in this space.
Investor interest in the leased office buildings has been increasing over the past few years with the sector contributing 53% of the overall investments in 2013 against 36% in 2012 and 30% in 2011.
"Office lease rental values have almost bottomed out and from hereon, they can only move up, timing is the only question," said Sachin Sandhir, managing director, RICS South Asia. "Correction in commercial property prices that has made valuations look attractive now, along with potential appreciation, has resulted in many investors eyeing these properties."
Besides offshore funds, domestic capital allocated for income generating office properties is also being raised and deployed.
According to Navin Kumar, director of investments at Milestone Capital Advisors, investors can avoid all major inherent risks associated with property acquisition including title clearance, development and cash flow itself through such deals.
Milestone Capital itself is planning to raise a Rs 500-crore real estate fund that is also likely to focus on investments in commercial assets offering stable rental yields.
"In terms of rentals, commercial assets offer yields of up to 9% on an average as against 3-4% in even in the case of best residential property, annual capital appreciation of average 5-7% is an added advantage," Kumar said. "That justifies any investors' interest in commercial properties especially now when office market has almost bottomed out."
According to experts, the timing for such deals is apt, notwithstanding if the buyer is an end user or investor.
"It is the perfect time for such transactions as developers with great assets on their balance sheet are looking for cash and the end user or investor can get good valuation and entry point. Most of the deals now are helping developers ease out the liquidity stress," said Sunil Rohokale, MD & CEO at ASK Group, which controls.
Currently, there are around 400 million square feet of pre-leased commercial assets across the country and all of these may not be of investors' interest, as quality of tenant and certainty of future cash flows matters.
"However, even if a certain portion of this size is considered, it is a big opportunity we are talking about," said Sandhir of RICS.