If the months gone by, between January and June 2016 are a yardstick to measure the success of the commercial real estate market in India, then certainly the H1 of this year has surpassed previous records.
With renewed investor confidence among institutional investors, private equity inflow has already been on a rise in the commercial real estate market in the first half of 2016. Commercial (read Office) realty received a boost from PE firms, with an investment of over Rs. 3,256 Cr., as against Rs. 3,229 Cr. in 2015, according to a recent study by JLL India. And, if these investments continue through the rest of the year, experts believe the figure may even cross the previous five-year high of Rs. 4,323 Cr. seen in 2014.
According to Anuj Puri, country head of JLL India, “The current developments relating to Real Estate Regulatory Authority (RERA) and Real Estate Investment Trusts (REITS) are major factors that will lead to more investments into the sector”. According to Mr. Puri, RERA is expected to bring about transparency and corporate governance, which is something that institutional investors certainly value. The possibility of an exit avenue, which is offered in the form of REITS is also a major contributing factor that prompts developers and institutions to own their own assets. And, an example of this has been one of the largest real estate transactions of this year – RMZ Corp (through their alliance with Qatar Investment Authority) acquiring the Equinox Business at BKC Mumbai for Rs. 2,400 Cr. from Essar Group.
There is a reason for this increased interest and higher levels of investment by PE majors in the commercial sector. And that can be attributed to favourable initiatives undertaken by the government, paired with the rise in overall occupancy levels, increased rentals and demand for commercial as well as office spaces by the IT & IT-eS, pharmaceutical, and banking and financial sectors. This has led to an overall trend where the demand for commercial assets is outstripping the supply in the market due to a lack of commercial asset development between 2011 and 2014. According to Rubi Arya, Executive Vice Chairman of Milestone Capital Advisors, this scenario is therefore idea for commercial real estate investments, since assets are available at attractive valuations. “Since the present demand exceeds the supply owning to lack of commercial asset development between 2011 and 2014, investments in commercial real estate are the right option for investors”.
A large chunk of global investors have in fact been investing in Indian realty assets since the past few years now. These comprise of PE majors such as the Blackstone Group, Singapore's sovereign fund GIC, Canada Pension Plan Investment Board (CPPIB), Goldman Sachs and Qatar Investment Authority. And, there are several more funds that are eyeing the possibilities of investments and alliance opportunities with Indian realty players. With the overall scenario being considerably different from what it was two years ago, investors can now expect greater capital and rental gains than before. Says Sudarshan Bajoria, MD of First Eagle Capital Advisors, “the mood has changed from what it used to be two years ago. Investors have started to see the yield curve coming down and now expect good capital gains besides rent appreciation. With this, more funds are prepared to assume equity risk in ready and leased commercial realty projects”
Equity flows in the commercial sector have turned stronger as against debt and mezzanine structures. While the right asset still remains a major focal point, many large investors now demonstrate a favourable trend towards equity participation in commercial projects. The increasing share of equity financing indicates strong positive sentiments for commercial assets.