Stiff competition among global private equity funds to invest in marquee, income-generating assets in India is driving down yield rates in the commercial real estate sector.
Yield refers to the rental income earned by a private equity fund as a proportion of its acquisition cost (of the commercial asset). This means value of commercial properties is on the upsurge.
A report by US based banking and financial services company, JPMorgan Chase says competition from private capital to lap up real estate is on the rise, compressing cap rates (or yields) in the market. Yield rates have declined from 10.75% to 9.5% on an average in the past one year, the report noted. Confirming the trend, Jitu Virwani, chairman and managing director of Bangalore based company, the Embassy Group, says going by ongoing negotiations, fund managers are ready to invest even in Grade-A assets, which will give investors an annual rental yield of 9%.
Rajiv Bairathi, executive director, capital transactions, Knight Frank believes it’s a case of too many foreign funds chasing a limited number of good assets. “Apart from existing funds looking to consolidate their asset portfolio, there is also a host of overseas funds trying to enter the Indian real estate sector”, Bairathi points out.
In its analysis JPMorgan observes that close to $2 billion to $3 billion worth of transactions have been concluded over the past two years, wherein PE funds or sovereign wealth funds have become active in concluding large ticket deals and buying out completed assets.
One private equity giant, Blackstone has built the majority of of its over 30 million sq. ft commercial asset empire by aggressively investing in just the past three years. Others such as CPPIB or Canada Pension Plan Investment Board made its foray into India by investing hefty sums in home-grown companies like L&T Infrastructure and Shapoorji Pallonji.
Some of the large-sized deals concluded in the past couple of years include Blackstone’s purchase of The Four Seasons and Vrindavan Tech Village in Bangalore, Express Towers in Mumbai; Goldman Sachs’ investments in Vatika Hotels and Nitesh Estates, GIC’s transaction in Nirlon’s Mumbai IT Park and Brookfield and Qatar Investment Authority’s respective investments in Unitech and RMZ.
Sanjay Dutt, executive managing director, Cushman & Wakefield South-Asia points out that compared to the peak of 2007, commercial properties are now going at attractive valuations. “It may be a good time to invest as demand is gradually picking up and absorption rates are improving” he observes, citing that absorption rates across the top eight cities have escalated by 28% to 33 million sq. ft. in 2014 compared to 2013.
During the same period, vacancy rates declined from 21% to 18% and supply grew by 9%. Bangalore led the net absorption in India, nearly doubling to 9 million sq. ft over a period of one year. Demand for commercial properties will be robust in the next two years as companies are executing their growth strategies, leading to an improvement in demand for office spaces, Dutt believes.
Meanwhile, the fact that the government is laying the groundwork to make REITs or real estate investment trusts tax competitive and allow them to trade on public exchanges has also propelled some of these transactions. For instance, Blackstone along with Embassy Developers and Qatar Investment Authority along with RMZ have announced plans to list their respective joint ventures.