Global private equity, pension and sovereign wealth funds eyeing commercial assets in India are now looking to build these assets with local developers given that the demand is far outstripping supply of grade A assets in key markets.
Blackstone, GIC, Brookfield and CPPIB have already taken most of the ready and leased assets, leaving other long-term investors ready to write big cheques to scout for partners for development opportunities on core assets.
“Increasingly global investors are seeking advice on arrangements to be made with local realty developers for developing greenfield assets rather than waiting for the asset to be built by someone else. With this, their returns are also expected to be better as they lock in commercials from day one,” said Bhairav Dalal, partner, PwC India.
PwC’s annual survey on emerging trends in real estate found Mumbai, Bangalore and New Delhi’s pan-Asia rankings in term of investment destination stood at 12, 15 and 20, respectively. However, interest from international investors remains unabated. The survey is based on 400 fund managers and developers across Asia.
“Developers are successfully attracting funds with good capitalisation rate for their assets. But, that means expensive deals for funds. In this backdrop, investors are open to an idea of developing their own assets provided they find right partners. Capital is not an issue for India, but correct alliances are,” said Rajesh Agarwal, CEO, Shapoorji Pallonji Investment Advisors.
Last month, global insurance and asset management major, Allianz Group, in its maiden property-related engagement in India, partnered with Shapoorji Pallonji Group to create an investment platform for office properties. The fund is aiming to raise $500 million in equity and is also open to greenfield investment opportunities in commercial and logistics segment.
This deal forms part of Allianz’s strategy to allocate about 5% of its global real estate portfolio to the Asia-Pacific region. Allianz’s total real estate exposure across the globe is worth 52 billion Euros and is the world’s second largest principal investor. It is looking to invest more in India, in line with most of the international institutional investors’ plans for Indian real estate.
For domestic institutional investors, however, tenure of their fund that usually is around 4-5 years, acts as a deterrent to take any open position in greenfield office project. “We may not get into a greenfield office project until we launch an 8-10-year tenure fund. In warehousing and logistics, not only have we done it in the past, but we also look forward to do this, going forward. These properties can be quickly constructed as per clients’ specification within 9-12 months and also offer 250-300 basis point higher returns compared to buying a pre-leased asset,” said Sandeep Chadha, partner at Milestone Capital Advisors.
In the backdrop of an ongoing transformation in business environment, Indian real estate is witnessing a robust rise in investment inflow as both foreign and domestic institutional investors are infusing more funds into the sector. Private equity investment into Indian real estate in 2017 is about to set a new milestone estimated to exceed $4 billion this year, well past the 2015 mark of $3.6 billion, the highest since 2010, a recent Knight Frank report showed.
The rise in investment flow is backed by long-term institutional investors’ confidence owing to rollout of a battery of reforms including the Real Estate (Regulation & Development) Act, 2016 (RERA) and relaxation of norms to encourage Real Estate Investment Trusts (REIT) listings.