After negotiating for more than a year, Mumbai-based real estate company Phoenix Mills has finally sealed another so-called platform deal with Canada Pension Plan Investment Board (CPPIB). The fund will invest $250 million (R1,600 crore) in Island Star Mall Developers, a unit of Phoenix Mills, which owns its mall under the brand name, Phoenix Marketcity in Bengaluru.
CPPIB will initially own 30% in Island Star with an equity commitment of approximately R724 crore. The pension fund plans to invest the remaining in multiple tranches, to eventually own up to 49%.
The contours of the transaction pegs the capitalisation of the deal at less than 7%, making it one of the most valuable deals seen in recent times. Capitalisation rate ascribes a value to the underlying asset; the lower the cap rate, the higher the value of the project. In general, institutional funds feel comfortable investing in income generating assets at rates above 10%, said experts. But competition is rife among the clutch of heavyweights such as Blackstone, CPPIB, GIC, APG, Brookfield and Morgan Stanley. “It might be a case of too many funds chasing few commercial assets that is driving down the cap rates” said Neeraj Sharma, partner at Grant Thornton, India.
The Bengaluru mall clocks in approximately `100 crore in rentals and has negligible vacancies. Debt on this project is `500 crore whereas its annual sales is to the tune of `885 crore, according to company disclosures.
Indeed, the pedigree of companies and projects that funds chase are too far and few in between. In the retail segment itself, whereas majority malls are 50% vacant, others like Phoenix Mills have a waiting period for brands that want space. It does not matter than the countrywide vacancy rate is as high as 20%, the institutional funds only entertain the top 10 players that represent 5% to 7% of the mall development segment.
But Phoenix, which has been scouting for new acquisitions in the past one year, could not have asked for better. Shishir Srivastava, CEO and joint managing director at Phoenix did not comment on specific deals but said the company will be looking to acquire new projects in Kolkata, Hyderabad, Ahmedabad, Indore and the national capital region (NCR).
“There is headroom for expansion in markets such as Mumbai and Pune too,” he added. One sector analyst in a foreign brokerage firm who did not wish to be named said making acquisitions is imperative to Phoenix’s next phase of growth as the firm now has seven malls, all of which are mature assets, leased out to long term tenants.
Pune and Ahmadabad have traditionally been “mall graveyards” and contributed significantly to the overall high 20% vacancy of malls but Srivastava said high vacancy is not because of low demand rather it’s a result of not getting the size, design or location right. “Supply has been negative in the last year so the need for new malls is genuine,” he said. According to a JLL, India report the net negative supply of malls was registered for about four million sq. ft in 2016.
In the markets where the company is looking to grow, Phoenix will look for malls that are sized at about a million sq ft. In the past, it has participated in auctions such as the one that GMR Infrastructure hosted for its 2 million sq ft plot near the airport in Delhi. Additionally, sources said that the company also negotiated for a mall in Coimbatore and a plot that Larson & Toubro (L&T) won as a part of the metro rail project in Hyderabad. Going forward, the company is open to both land acquisitions as well as ready or partially developed outfits, Srivastava confirmed.