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Too many investors, too few deals

Milestone Capital, the majority owner of 247 Park, a 1.12-million-square-feet office complex in Mumbai, has been in talks with private equity giant Blackstone, and a host of companies like APG-Xander, the CPPIB (Canada Pension Plan Investment Board) -Shapoorji Pallonji group combine and the ADIA (Abu Dhabi Investment Authority) -Kotak combine. But the deal, estimated to be worth Rs 1,000 crore, is yet to be closed.

Real estate developer Unitech, through its bankers, was last year negotiating with global investors like Morgan Stanley, the Singapore government-owned GIC, RMZ-QIA (Qatar Investment Authority) and Blackstone, to sell its infotech special economic zone (SEZ) in Gurgaon. But it was Canada-based Brookfield, which owns a stake in AIM-listed Unitech Corporate Parks, that eventually bought all six of Unitech’s SEZs, including the Gurgaon one.

Similarly, Delhi-based 3C group negotiated with Xander and Singapore-based Ascendas before selling its SEZ but later sealed a deal for Rs 625 crore with Blackstone.

Welcome to the era of too many investors chasing a limited number of commercial real estate deals. A host of foreign investors – Blackstone, Xander, GIC, Ascendas, CPPIB, ADIA, QIA – are slugging it out in the market but only a few commercial property deals are taking place.

“There is too much liquidity chasing a limited number of good commercial assets. There also are a few foreign funds not present in India currently but willing to pay premiums for these assets,” said Rajeev Bairathi, executive director, capital transactions group at UK-based consultant Knight Frank.

A reason for investors/funds focusing on commercial properties like IT parks and office buildings is that these assets are perceived as low-risk ones that generate fixed income.

“These investors have previously burnt their fingers in real estate. They are, therefore, now opting for leased-out commercial properties that are risk-mitigated assets. Once they have established themselves in these assets, they might expand their risk profile,” said a source in the Shapoorji Pallonji group.

According to the source, only 55 to 60 assets are seen as Grade-A commercial properties which big investors could purchase. Grade-A properties are those that are centrally air-conditioned, well-maintained and secured.

“Not many want to sell their properties. So, investors are chasing the few available in the market,” the source said.

  • Unitech last year negotiated with Morgan Stanley, GIC, RMZ-QIA and Blackstone before selling its Gurgaon IT SEZ to Canada-based Brookfield
  • Delhi-based 3C Group, which was in talks with Xander and Ascendas, later sold its SEZ to Blackstone for Rs 625 crore
  • GIC has said it is buying 70% in Nirlon, which owns a corporate park in Mumbai, for Rs 1,300 crore; among other investors said to be in race were Ascendas, Blackstone, CPPIB-Shapoorji Pallonji and Xander
  • For 247 Park, a 1.12 mn sq ft office complex in Mumbai, Milestone Capital has held talks with Blackstone, APG-Xander, CPPIB-Shapoorji Pallonji and ADIA-Kotak; the estimated Rs 1,000-crore deal is yet to be sealed

A former Blackstone executive added: “Large foreign funds like to own income-generating assets. But the mall-hotel-apartment story is not attractive for them, for various reasons. That is why you are seeing all action taking place in the office space. Investors are betting on future gains from office properties.”

Cushman & Wakefield Managing Director Sanjay Dutt said though not much had changed fundamentally, investors were thinking things would improve, rent would go up and Reits (real estate investment trusts) would be functional, when the regulations on these settled.

The market for office properties has already seen revival of sorts. According to HDFC Securities, the December quarter of 2013 recorded absorption of 10.1 million sq ft – 40 per cent higher than the previous quarter and 95 per cent more than a year ago. According to the brokerage, this was the first time quarterly absorption exceeded 10 million sq ft on a pan-Indian basis.

“With an improvement in corporate activity and better sentiment in the capital market, there are several deals in the pipeline that might drive absorption levels from calendar year 2015,” HDFC Securities analyst, Adhidev Chattopadhyay, said in a recent report.

Increased valuations
An increased investor interest has also led to a rise in valuation of these assets, according to investors and consultants.

More recently, Singapore’s sovereign fund GIC said on December 23 that it was buying about 70 per cent in BSE-listed Nirlon Ltd, which owns a corporate park in Mumbai’s Goregaon, in a deal valued at about Rs 1,300 crore. Other top investors like Ascendas, Blackstone, CPPIB-Shapoorji and Xander were also said to be in talks with Nirlon.

Investor interest in this deal can be gauged from the fact that the share price of Nirlon rose 189 per cent from March 31 last year to the announcement on December 23. The deal was announced at Rs 222 a share.

According to Cushman & Wakefield’s Dutt, commercial yields have come down from 12 per cent to 9.5-10 per cent, thanks to an increase in competition for such assets and a decline in inflation triggering the hope of an interest rate reduction.

“This also means if you were to go for a leveraged buyout, you might be able to buy assets at yields lower than nine per cent, given that capital is cheaper than before. This phenomenon is expected to lead to an increase in asset value and, thereby, the opportunity for investors,” Dutt said.

Sellers of assets, though, are not amused with the heightened interest. “For big investors, a $ 200-300-million transaction is no big deal, especially as they have five to six years before they exit,” said Navin Kumar, executive director at Milestone Capital, which is selling its office complex in Mumbai’s Vikhroli area.


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