With the initial hiccups out of the way, regulatory reforms — such as Real Estate Regulation and Development Act (RERA), Benami Transactions (Prohibition) Amendment Act and Goods and Services Tax (GST) — that dampened the real estate sector over the past two years, appear to be drawing in investors now. These reforms bring in more transparency and efficiency, making investments in the space attractive.
The real estate sector recorded the highest private equity (PE) deal activities during the first half of 2018. Nearly 23 per cent of the total PE deal value was from this sector, according to a Grant Thornton report. It was largely characterised by big ticket deals, especially in commercial properties, which provide better returns than the residential and retail segments. Though the majority of listed players have a strong presence in the residential segment, they are steadily growing in the commercial space, to cash in on the opportunity. This has cushioned them from the lacklustre demand in the residential market in recent quarters.
PE investment
Within the commercial properties segment, office space has seen a strong demand from investors over the past few years. In 2018 (till June), nearly 12 deals for office space worth $2,784 million have been sealed, as against nine deals worth $2,252 million last year, according to global real estate consultant Knight Frank.
Lack of availability of quality office space is one reason why investors are making a beeline for this segment. Post the financial crisis in 2008-09, when demand for office space fell, developers shifted their focus to residential projects, which is why, now, there is a dearth of good office space. Meeting the demand in cities such as Mumbai, Delhi and Bengaluru is a challenge.
Nearly 76 per cent of the investments in office space are from PE investors (the remaining from sovereign pension funds) who are trying to make the most of the shortage in supply. Commercial properties have a long gestation period — it takes time for the property to stabilise and start giving returns. Hence, PE investors prefer matured office assets that can provide immediate returns. In addition, the rental value of properties has escalated over the years, especially in cities such as Mumbai and Bengaluru. For instance, Brookfield Asset Management has bought Essar Group’s fully-developed Equinox Business Park in Mumbai.
Investors from Singapore, such as GIC Pvt Ltd and Xander Investment Management, constituted the largest chunk, investing around $3.3 billion in 16 deals over seven years, from 2011-2018, according to a Knight Frank report. This is followed by the US and Canada.
Favoured cities
According to the Knight Frank report, the rental value of office space during the first half of 2018 grew 5 per cent y-o-y, with the IT/ITeS industry occupying the most area. Most markets witnessed healthy but single-digit growth in the first half of 2018. The Bengaluru market, however, saw robust rental growth of 17 per cent y-o-y, thanks to large corporates taking up space in the central business district. The average rental worked out to be as little as ₹70 per sq ft a month. An acute shortage of space has, however, pushed companies to engage in pre-commitment arrangements. Other cities such as Delhi, Pune, Ahmedabad and Hyderabad have also seen good growth in rental income during the first half of 2018.
These regions have attracted nearly $8.3 billion PE investments, with Mumbai and Delhi dominating the funds inflow in the last seven years. Nearly 25 per cent of the deals are from Mumbai, followed by Delhi, Hyderabad and Bengaluru. Between 2011 and 2018 investors have shown interest in about 138 million sq ft of office space .
Given that 89 per cent of the PE investment into office space has gone into developed properties, this trend is likely to continue, and companies which expect to complete commercial projects in the next three-four years may be able to attract investors. For instance, in Mumbai, players such as Oberoi Realty have multiple commercial projects under construction in key areas such as Goregaon. Similarly, Bengaluru-based Brigade Enterprises and Prestige Estates Properties, too, have various commercial projects under construction at various stages of completion in prime locations in southern India.