Why PEs prefer pre-leased IT parks, SEZs to residential projects

Real estate-focused private equity funds are looking at investing in pre-leased commercial projects, including IT parks and special economic zones, as look for assured returns on their investments. Such investments can provide a buffer for funds, which do not produce the expected returns.

Taking this opportunity, international private equity funds like Blackstone, Baring Private Equity Partners and Xander have already invested in pre-leased assets such as IT

parks and SEZs. While US-based firm Blackstone has invested in two properties each in Pune and Bangalore, Xander has bought stake in an IT park in Chennai, while Baring Private Equity Partners has invested RMZ Corp, which is the largest office space builder in the South.

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“Some PE funds with a real estate orientation are investing in pre-leased commercial projects pre-dominantly in IT Parks and SEZs in addition to residential projects. “Though these developments yield lower returns than residential assets, they give some assurance of steady annual returns,” said Jones Lang LaSalle India Managing Director (Corporate Finance) Ambar Maheshwari.

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“These investments are happening selectively, because a lot of investors have burnt their fingers by investing in underdeveloped commercial properties. There is oversupply in

this space and it is very difficult to ascertain if a project will be commercially viable or not.

“Investing in pre-leased commercial projects is a relatively low-risk route, which also provides a reasonable assurance on returns,” Maheshwari said.

Echoing similar views, DTZ Chief Executive Anshul Jain said, “Though residential projects continue to be a lucrative market for PEs, the guarantee of assured returns on their

capital deployed in pre-leased projects is attracting them to invest in such properties.”

According to statistics, the return on equity deployed in retail and commercial properties last year was $0.7 and $ 0.8, respectively, per $1 investment. On the other hand, the return per dollar in residential properties was $ 1.3. However, in land deals the valuation received per dollar was around $5.

Speaking about this growing trend, a senior official from Tata Realty and Infrastructure, who did not wished to be named, said, “Due to delay in project approvals, high land and construction costs, the risks involved in investing in residential and other development projects is high, as they may fail to yield the average expected return of 25 percent.

“Therefore, PE funds are now looking at commercial and retail properties for investment though the returns are low,” the official added. Although these projects churn out returns which are a tad lower than the conventional residential projects, they essentially provide annuity incomes for investors, he added.

PTI