Forget residential, commercial realty is the flavour for PE investors

Looks like global private equity funds are once again betting oncommercialreal estate thanks to low rentals, stable yields and a fall in valuation. Experts are betting on a revival in this sector as the office space seems to have bottomed out.

Also theprospectsofof the real estate investment trusts (Reits) which will provide an avenue to real estate developers to commercialise developed property, seems to beprompting foreign investors such as Blackstone, Ascendas and GIG to pump in money into the sector.

This morning Reuers reported that Canada Pension Plan Investment Board (CPPIB) plans to invest $200 million for an 80 percent stake in a joint venture with Shapoorji Pallonji Group to buy real estate assets in India, The joint venture will invest in leased, income-producing office buildings. Shapoorji Pallonji operates information technology parks under the SP Infocity brand in IT and IT-enabled services (ITeS) at software technology parks and Special Economic Zones. It has IT parks and SEZs in Chennai, Gurgaon, Manesar, Mohali, Nagpur and Pune, with 4.6 million sq ft of space. It plans on further developing commercial space in its existing projects at Chennai, Pune and Mohali.

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[caption id=“attachment_1148283” align=“alignleft” width=“380”]  Representational image of a construction site. Reuters image[/caption]

On November 19,Singapore-based commercial space developer Ascendas Pte Ltd launched the Ascendas India Growth Programme, targeting an asset size of over Rs 3,000 crore (S$600 million) to invest in commercial space in major Indian cities. Singapore’s sovereign wealth fund GIC Private Ltd is a principal investor in the programme.

Data from Venture Intelligence, a research firm that tracks private-equity investments in India, shows Blackstone Group LP and HDFC Property Ventures Ltd, the private-equity unit of India’s largest mortgage lender, made a $367 million (Rs 1,951crore) investment in Bangalore-based Embassy Group in February.

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It had picked up a 50% interest in Embassy’s rent yielding office portfolio of 13.5 million sq ft.And earlier this month Blackstone India along with property magnates Atul and Sagar Chordia of Panchshil Realty sealed a deal to buy Express Towers, an iconic Mumbai office building for Rs 900 crore ($140 million).

According to a report in the Business Standard, Blackstone is also competing with GIC, Singapore’s government sovereign wealth fund, to buy Unitech’s 3.6-million sq ft IT park in Gurgaon for about Rs 2,600 crore, while it is in final stages of discussion with HCC Real Estate and Milestone Capital to buy office park in Vikhroli, Mumbai for Rs 1,000 crore.

Already, this US-based PE firm has spent more than $600 million in the past two years controlling about 21 million sq ft of office buildings, which are tenanted or nearing a lease deal. And is now on the hunt for more.

“This is a great time for PE funds to lap up commercial properties as rents are at low now and are bound to go up once the business sentiment improves,” said Viral Desai, director-office transactions, at Knight Frank India.

“The current commercial real estate market continues to be tenant/ investor leaning. Tenants as well as investors should capitalise on this time as Grade A commercial supply is shrinking with developers shying away from launching new projects,” Desai added.

Earlier this month, evenprivate equity funds such as Kotak Realty Fund, Tata Realty and Infrastructure (TRIL), Blackstone and Xander said that they were considering options to float real estate investment trusts (Reit) once the Securities and Exchange Board of India (Sebi) comes out with final guidelines on these.

Reit is a tax-efficient investment vehicle that invests in real estate assets to generate income, which is then passed on to investors.And given the slowdown and paucity of funds, Reits are expected to infuse a fresh lease of life into the real estate market.

A Cushman & Wakefield report released recently said the estimated demand for office space across the top eight Indian cities in the period 2013 - 2017 is expected to be 132 million square feet. A CBRE Research, meanwhile, pegs this number at more than 150 million and expects the top seven cities to see completion of office space worth the market size of yet another Mumbai and Delhi NCR.