Office space wins over residential: Now GSC plans $1 bn India investment

Slowdown in the residential realty is turning out to be a boon for India’s commercial realty space. High rental yields in the office space seem to be luring global private equity investors back to India.

Stung by high real estate costs, corporate houses are looking at more efficient use of existing space and increasingly relocating themselves to cheaper locations. This has led to a risein investments in leased-income-generating office properties. As a result, value of PE transactions in India’s real estate sector in the nine month period to September surged 26 percent, according to a report by realty consultant Cushman & Wakefield.

“Private equity funds focused on real estate started out as pure equity players, with investments during the peaking period of 2005-2008 directed primarily towards the commercial office sector. Investments are now mostly directed towards pre-leased assets or operational assets with healthy occupancy levels…Funds are looking at market level protection to ensure that principal capital has sufficient safeguards,” said Colin Dyer, President & CEO - Jones Lang LaSalle Inc.

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Today the Business Standard has reported that US-based private equity firm Golden State Capital (GSC) has decided to invest close to $1 billion in India over the next three years through its real estate investment trust (REIT).

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“We see REIT as a good platform to acquire high-quality office assets in cities like Gurgaon, Noida, Bangalore, Pune, Chennai, Mumbai and Hyderabad. Our investors would look forward to stabilised returns and a robust diversified portfolio,“GSC Chairman Sumit Nanda has told the Business Standard in an interview.

Securities and Exchange Board of India’s (Sebi’s) draft guidelines for REITs, released in October, will enable Indian realty companies to come up with REITs. The regulations are expected to be finalised within a year.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.

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“The rental yield for commercial property is usually 9-11%. In contrast, the yield for residential property is much lower at 2-3.5%. The demand for office space in India is likely to stand at around 200 million square feet over the next five years. Post the global financial crisis, prices in markets like Mumbai have dropped around 35-40% and have bottomed out in most micro-markets, offering investors a good opportunity to buy into commercial real estate,” Ramesh Nair, COO operations at Jones Lang LaSalle India told Firstpost earlier.

Asset classes like office space benefit from long-term capital appreciation, giving investors a solid base on which they can grow their million dollar investments.

Global PE firms like Blackstone have binged on the Indian office space story - booked profits in a market where return on investments has been abysmal.

Cushman & Wakefield (C&W) expects the absorption rates to improve in the top eight cities for the next four years - from 22.55 million sq ft in 2013 to 28.11 million sq ft by 2016. It expects a fresh supply of 143 million sq ft (of office space) to come into the market by the end of 2017, in value possibly equal to the Mumbai or Delhi NCR market.