It might be tough times for real estate players, many of whom aren’t able to rustle up the kind of revenues they would like. But several of them are using the slump to build up an inventory of land in anticipation of a recovery. In the past few months, K Raheja Corporation, Piramal Realty, Brigade Enterprises, Puravankara and Embassy Developers have all bought land to build either commercial or residential facilities. And the market is watching to see how much Crompton Greaves’ parcel of about an acre in Worli fetches with estimates at close to Rs 220-230 crore. Among those that have articulated plans to acquire new projects are Oberoi Realty, Godrej Properties and Prestige Estates.
Meanwhile, DB Realty is believed to have sold its Marine Lines plot to Piramal Realty for approximately Rs 800 crore, although no one’s confirming the development.
Sunil Rohokale, CEO and MD of Mumbai-based ASK Group, isn’t surprised there’s so much action. “Market conditions are conducive because valuations are reasonable and one can negotiate with owners,” Rohokole said. ASK hand-holds developers from the land-buying stage itself and recently closed a deal, partnering with Puravankara in Chennai, for an affordable housing project.
In a recent transaction, Tata Realty and Infrastructure (TRIL) is believed to have bought a 30-acre land parcel in Thane district for approximately Rs 200 crore, two sources have confirmed to FE. In a deal that has been in the making for several months, TRIL outbid three rivals making a final offer to Cabot India, a US-based chemicals company, looking to exit the project. Sources added an initial term sheet has been signed to this effect. TRIL, a wholly-owned subsidiary of Tata Sons, did not respond to FE’s queries on the transaction.
The land parcel located on the Thane-Belapur road could be converted into an IT park.
Earlier, HSBC sold an acre of land to K Raheja Corporation for approximately Rs 230 crore. The plot had attracted more than a dozen bids, given its prime location in Worli, an upscale micro-market where there isn’t too much space to build on. The Brigade Enterprises-GIC (Government of Singapore Investment Corporation) duo lapped up Kansai Nerolac’s 16-acre plot in Chennai for R550 crore for an affordable housing project.
Local developers are teaming up with foreign and domestic private equity (PE) funds looking for a share of the pie too. Leading global investment funds such as GIC, Blackstone, APG and Piramal Fund Management are all in the process of building a bank. “Typically, developers fund land acquisitions either from internal accruals or unstructured high-yield borrowings. But PE funds are now willing to invest even at the land purchase stage,” said Khushru Jijina, managing director at Piramal Management Fund. Such investments target returns in the range of a gross IRR of 30% plus, Jijina added. Given the several risks relating to the land purchases — a clear title, permissions — PE funds expect a high return. Generally, IRR expectations from residential projects are far lower at between 16%-24% and depend on the terms at which deals are struck.
Right now, there are more transactions in the commercial segment. Knight Frank noted in a recent report Bengaluru, Mumbai and Delhi had topped London and New York at rental yields making them a good bet. Firms like Blackstone have been very active in the last two years, acquiring the bulk of its 30 million square feet of commercial portfolio in this time. Bengaluru, the country’s IT capital, offers a rental yield of 10.5%, whereas returns in Mumbai are around 10%, this report added. Shishir Baijal, chairman and managing director of Knight Frank India, observed that the Indian office market has clocked in 18 million square feet of transactions in the first six months of 2015. “The expectation is that 2015 will close with 40 million square feet of office space absorption, the highest since 2011,” Baijal added.