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  1. PEs bet bigger on office space, realty deal size up 70% in 3 yrs

PEs bet bigger on office space, realty deal size up 70% in 3 yrs

In a sign of increasing confidence in the sector, ticket sizes of real estate private equity (PE) deals have gone up by a sharp 70% in the last three years. Data sourced from Cushman and Wakefield show, however, the surge in investments has been restricted to the commercial segment.

By: | Published: September 12, 2016 6:29 AM
In a sign of increasing confidence in the sector, ticket sizes of real estate private equity (PE) deals have gone up by a sharp 70% in the last three years. Data sourced from Cushman and Wakefield show, however, the surge in investments has been restricted to the commercial segment. In a sign of increasing confidence in the sector, ticket sizes of real estate private equity (PE) deals have gone up by a sharp 70% in the last three years. Data sourced from Cushman and Wakefield show, however, the surge in investments has been restricted to the commercial segment.

In a sign of increasing confidence in the sector, ticket sizes of real estate private equity (PE) deals have gone up by a sharp 70% in the last three years. Data sourced from Cushman and Wakefield show, however, the surge in investments has been restricted to the commercial segment.

On average, deal sizes have increased from Rs 200 crore in 2013 to Rs 336 crore in H12016; while the commercial segment has attracted transactions averaging Rs 700 crore, in the residential segment, these have averaged just Rs 200 crore.

Amber Maheshwari, CEO, Indiabulls Asset Management, pointed out the commercial space has attracted money from large sovereign funds with patient capital with tenures, at time, of more than ten years. In comparison, smaller investors have shorter investment cycles. “It is difficult to make good returns in investments of above Rs 500 crore in a shorter time period unless the sector is booming, ” Maheshwari said.

Knight Frank estimates residential sales rose annually by 7% in the past year. The offtake in the commercial segment, however, has been higher at 12% annually, hitting an all- time high in 2015. Blackstone, for instance, has accumulated large portfolio of 30 million sq ft in the past four years. “Foreign funds believe properties which are generating cash flows could be a good bet at this time, Prakash Kalothia, managing director and CEO at Sun-Area Property Advisors said.

Which is why most investors are eyeing either office space or malls. Brookfield is believed to have invested in a one million sq ft portfolio after buying Unitech Corporate Park. QIA (Qatar Investment Authority) has teamed up with Bengaluru-based company, RMZ while Kotak, GIC, CPPIB, Xander are bidding at auctions for major commercial portfolios.

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Office and mall properties are already going for a premium, Kalothia added. Cap rates have fallen somewhat from 10% to 8%, in the past couple of years which means office buildings have become more expensive. One fund manager, scouting for a commercial deal , told FE he believes levels of 9.7% would be promising.

Industry experts said companies looking to float REITs expect a rate closer to 6% which would be expensive even by global standards. Nevertheless, Neeraj Sharma, partner, Grant Thornton, said ballooning deal sizes are the result of predictable revenues. “In commercial projects cash flows are more visible and they also carry lower approval risk,” Sharma said. With hardly any fund having taken on a construction risk and limited availability of Grade A offices and malls, it might be a case of one too many funds chasing a handful of properties.

Experts point out the residential segment is broader both in terms of companies as well as micro markets. Moreover, it is also in dire need of equity as most projects are over- leveraged. However, the sector is fraught with risk given developers are stuck with half-sold projects and buyers are waiting for prices to trend lower and lenders are staying away. Sharma believes RERA, which should be up in a year, would help. “Investors would have more confidence and this could lead to a more equity-based funding,” he added. In the meantime, fund managers are likely to stay away from residential projects even if they are less capital intensive and earn from the pre-launch stage.

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