Since 2005, when India opened its property sector to foreign investors, money has mostly poured into housing because of simpler investment rules while sales of finished homes provide private equity funds a clear exit. But with Indian home prices down between 5 and 30 percent since 2009, some investors are moving into commercial assets that yield steady rental income and limiting their exposure to the volatile residential market.
Despite a limited supply of commercial real estate open to foreign investment and a lack of exit options, many investors such as Morgan Stanley and Rothschild-backed Xander Group Inc are eager to grab a bigger slice of India's property market due to the country's fast-growing economy, the promise of double-digit returns and attractive valuations.
"We waited till valuations got a bit softer and more attractive. And now, we are going aggressive," Akhil Gupta, chairman of Blackstone India, said in an interview. "We have done a few large deals, and are looking to infuse more capital."
Blackstone, the biggest global private equity property investor, is the most active in India and has spent $500 million on about 20 million square feet (1.8 million square metres) of leased assets over the past 18 months.
It is now on the hunt for more.
Most of Blackstone's India acquisitions are made jointly with Embassy Group, a Bangalore-based developer that invests largely in South India.
The duo is in talks to buy a special economic zone in Gurgaon - the booming satellite city outside the capital New Delhi - for about 24 billion rupees ($440 million), two sources with direct knowledge of the matter told Reuters earlier this month. That would be India's biggest private equity real estate investment since 2008.
Owned by Unitech Corporate Parks and developed by Delhi-based Unitech Ltd, the special economic zone has 3.7 million square feet of leased offices and potential to develop another 1.8 million square feet, sources have said.
The deal would follow Blackstone's recent agreement, according to a Reuters report, to buy a technology park in Bangalore, along with Embassy and a domestic property fund, for around $367 million.
Blackstone and Embassy declined to comment.
As of last year, investment in Indian property by private equity funds totalled $1.95 billion, with 57 percent of it in commercial assets. That compares with $9.8 billion in 2007, when most of it was in residential projects, according to Chennai-based data firm Venture Intelligence.
The value of commercial property being built in India has risen to around $42 billion today, still just a third of the value of homes under construction, compared with $34 billion in mid-2010, according to property consultant Jones Lang LaSalle.
Not all of this can be bought by overseas funds as Indian rules allow them to invest only in technology parks and special economic zones. Also, foreign property investors cannot sell for three years.
Rising competition for the limited pool of income-producing assets has pushed rental yields - annual rental income divided by the cost of the asset - down to about 10 percent from 12 to 13 percent, investors say.
Exit opportunities for funds are also few, as India does not yet permit publicly listed real estate investment trusts (REITs), although it is considering allowing such vehicles, which pool income-generating assets. That means investors looking to cash out can form private REITs, list the assets as REITs in places such as London and Singapore, or sell to another investor.
Morgan Stanley, which has made several residential property investments in India, is in talks to invest $186 million in its first office development in the country, in Mumbai's Bandra-Kurla financial district, Reuters reported recently.
For residential projects, where returns can be higher, Morgan Stanley will stick to projects where approvals are largely in place and land has been acquired, said Shirish Godbole, managing director at Morgan Stanley Real Estate Investing (MSREI) India.
Returns on leased assets are between 14 and 16 percent, compared with residential development projects that return 19 to 21 percent, according to Jones Lang LaSalle.