Singapore sovereign wealth fund GIC’s acquisition of a stake in Nirlon makes it the second deal signed by the fund in Indian real estate in a week’s time, indicating the reviving interest of foreign investors in India’s realty market.
Last week, an affiliate of GIC had entered into a joint venture with Vatika Group to develop two projects in Gurgaon with a development potential of over 2.3 million square feet.
On Tuesday, Nirlon, a listed entity, announced that Reco Berry, an arm of GIC (Realty), has agreed to acquire up to 34.2% in Nirlon at a price not exceeding Rs 222 per share, and announced an open offer for an additional 28.4% in the company at the same price. Assuming that the open offer is fully subscribed, the acquirer will hold 62.6% of Nirlon — that will take the deal’s value to Rs 1,252 crore, or $197 million, at the current dollar-rupee exchange rate of around Rs 63. The company also said that GIC has signed definitive agreements, subject to conditions (including the response to the offer), to purchase an additional 5% shareholding in Nirlon from other existing shareholders, and is in discussions with certain other shareholders to acquire up to 2% shareholding in Nirlon.
Loh Wai Keong, managing director & co-head Asia, GIC Real Estate, said, “This acquisition is consistent with our strategy in India to invest in assets that generate stable income streams over the long term.” In the last one year, GIC’s interest in Indian real estate has become prominent. Apart from Vatika and Nirlon, GIC tied up with Bangalore’s Brigade Group and launched Ascendas
India Growth Programme, along with business space solutions provider Ascendas.
Nirlon, once a nylon textile producer, now owns a commercial asset in Mumbai. It registered with BIFR (Board for Industrial and Financial Reconstruction) as a sick unit in 1988 and started offering its idle and surplus factory premises for leasing at its Goregaon complex to companies in 1999. In 2006, the company came out of BIFR and started planning Nirlon Knowledge Park (NKP), a 23-acre information technology (IT) Park at Goregaon in the Western suburbs of Mumbai, the company’s erstwhile factory location.
NKP will have a total constructed area of about 33 lakh sq. ft once completed. According to the company’s FY14 report, the first three phases of the project are complete and the fourth phase is expected to be complete in the January-March quarter of 2015.
The company earned a gross rent of Rs 14.23 crore per month (as on March 31, 2014) from the three completed phases, and an additional gross rent of around Rs 2.69 crore per month accrued from other licensees occupying existing old buildings in NKP, according to the annual report. So, the annual rent works out to around Rs 203.04 crore at the end of March 2014. The company expects to generate a further Rs 4.03 crore per month (Rs 48.36 annual) in rent after commencement of Phase 4 during the April-June quarter of 2015.
Consultants said the deal has happened at an attractive price — the capitalisation rates are expected to drop from these levels. The transaction is said to have closed at a cap rate of 10%, according to current rents generated by the property. A real estate valuation measure, cap rate is calculated as the ratio between the net operating income produced by an asset and the original capital cost or its current market value.
Ramesh Nair, COO (business and international director), JLL India, said, “The current cap rate is around 10-11%, which is expected to drop to 8-9% with expectations of an interest rate cut by the RBI and also with availability of listing instruments like REITs soon.” Nair added that it was a good buy for GIC — the availability of income-yielding commercial assets is limited in India.
Viral Desai, director (office transactions), Knight Frank India, says, “Commercial real estate is expected to grow strongly from here. There should be an appreciation of 10-15% in rents on a pan-India basis in the next few months.”
NKP is widely considered a good commercial asset, currently commanding rents of Rs 90-100 per sq.ft per month, which, sources say, is in line with rents in Grade A buildings in Goregaon. It boasts of tenants like Indian IT major TCS and financial institutions like Barclays, Citibank, Morgan Stanley and Deutsche Bank, who have their back-end operations there.