Private Equity Players Being Very Optimistic Over Commercial Space

With private equity (PE) segment having done pretty well in 2015, the PE players now are planning to snap up more office spaces with the hope that real estate investment trusts will take off soon. Well-known players like Blackstone already have accumulated a portfolio of about 30 million sq. ft. commercial space. And now, other prominent players like Piramal Asset Management, Kotak Realty, Macquarie, Brookfield Asset Management and Milestone are shopping for commercial properties.

If the sources are to be believed, Kotak Realty might soon team up with a Bengaluru based company taking up 10 million sq. ft. space. Meanwhile, Piramal has kept aside the budget of about RS 5000 Cr. to invest on commercial properties in FY17 and Milestone is in its way to rise about RS 500 Cr. for the same. However, the experts opine that the purchases will be funded through structured debt instead of equity while a few ancestry players may attract equity. The experts also say that the fund managers will be highly cautious.

How PE Players are Funding Projects?

Khushru Jijina, managing director of Piramal Fund Management says that his company will fund projects mainly through senior secured debt and construction financing. According to him, the players like Piramal can be more competitive than the banks that charge builder interest rates in early teens. Jijina also adds, the firm can offer customized repayment schedules and flexible interest servicing.72% of the total transactions in the last year were financed by structured debt having the residential piece accounting for the bulk of money. But this time mezzanine financing is more likely to be seen in the commercial real estate segment, which unfortunately is not the good news for a whole lot of companies which are looking to deleverage the equity, says Rajeev Bairathi, ED at Knight Frank India.The hold of smart developers such as DLF, Divyashree Developers, Prestige Estates and K Raheja Corporation, is combining the position in the projects to extract the better pieces from the equity funds. In the last two months, there have been at least two instances where the promoters are buying out the partners and putting the pool of income generating assets together.

Cap Rates and Commercial Real Estate

Given how the investors like CPPIB, Blackstone, GIC, and QIA have been scouting actively for commercial developments, cap rates in the real estate sector seem to have come off driving up the valuations. Industry experts say that the cap rates have been falling approximately from 11% to 9% over the past two years for Grade-A developments, making CRE an expensive proposition.However, while the cap rates for the built-up projects have fallen, there are opportunities in acquiring the properties that are half-built and those in need of last mile funding, says Vikas Chimakurthy, the Director of Kotak Realty. But according to the management at Milestone, the firm chooses the assets which can deliver 12% IRR and the rental yields of about 15% in the next three years, making Mumbai and Bengaluru the best hunting grounds.One of the established property consultant firms recently reported that, about 38 million sq. ft. office space was absorbed in the year 2015, which was termed to be the highest absorption, with Bengaluru leading the way followed by Delhi NCR. The rental values in central business districts (CBDs) were stable, except in Pune and Bengaluru. Also, 30% of the $3.96 billion which was invested on real estate by PE funds was on commercial sector, which says that the PE players are being highly optimistic over commercial spaces.