In what could be the largest real estate deal in recent memory, Mumbai-based realty major K Raheja Corporation is set to buy out the share of JPMorgan in the Airoli Gigaplex commercial project in Navi Mumbai. Three people familiar with the development told FE that while there were others interested, the Rahejas were likely to clinch the deal given they own 51% in the venture.
The price paid for JPMorgan’s 49% stake will no doubt pencil in the debt taken on for the project. A back-of-the-envelope calculation pegs the value of the project at approximately R2,400 crore. This assumes a rent of R45 per sq ft per month and a yield value of 9.6% for the 1.2 million sq ft that has already been leased out and 11.5% for the remaining 3.6 million sq ft that is under construction. Among the tenants at the Gigaplex are IGATE, Capgemini, Axis Bank and Bhansali Infotech. Rentals in Airoli are already touching R50 per sq ft a month and could rise by 8-10% over the next year, according to Cushman &Wakefield data.
Executives at K Raheja Corporation and JPMorgan declined to comment. The investment of $36.6 million made by JPMorgan in the venture in November 2007 was among the fund’s earliest in India. Interestingly, in 2010, the ownership of the project changed hands from B Raheja Builders to K Raheja Corporation. In the process, JPMorgan had partially sold its stake at an internal rate of return of 16.7%, according to the company’s own disclosures.
But experts said it might incorrect to correlate returns of partial exits with total exits. Ramesh Nair, COO, Jones Lang LaSalle (JLL) India, pointed out yields have fallen from about 12% to 9% in the past two years for assets that have been fully leased out. “We have not seen a transaction in a partially leased out asset recently so it’s difficult to ascribe a general cap rate,” Nair explained.
A March report by JPMorgan said that cap rates (or yield rates) have declined to levels of 9.5% from 10.75% on average in the past one year. Yield refers to the rental income earned by a private equity fund as a proportion of its acquisition cost. This means the value of commercial properties is on the rise, which is probably why promoters are upping their stakes. Prestige Estates is another company in the process of buying back its commercial project, Exora Park, from Red Fort Capital.
A JLL India report on decoding private equity exits from India noted that over half of such exits happen through promoter buybacks in India, possibly because of a lack of secondary investors in the market.
“Promoters also want to exercise 100% control in the projects, strengthen the commercial portfolio and possibly divest stake when the market favours,” enumerated Rajeev Bairathi, executive director of capital transactions at Knight Frank India. In the past, K Raheja Corporation has articulated its plan to launch a real estate investment trust or REIT issue, provided dividend distribution tax issues pertaining to REIT regulations were rationalised.
JPMorgan holds 49% stake in the project
JPMorgan to exit investment made in 2007
Airoli commercial rents on the upsurge