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Investments in office realty poised to climb fresh peak

LiveMint logoLiveMint 12-09-2017 Madhurima Nandy

Fund-raising and investments in India’s office space sector are expected to hit a peak as local developers and foreign investors expand their portfolios through fresh investments and acquisitions or launch real estate investment trusts (REITs) to monetize existing portfolios.

Thus far in 2017, more than $2 billion worth foreign investment deals in commercial real estate have been closed—mainly to acquire stakes in projects and companies. Another $1.4 billion of foreign investment is expected, to build and acquire office assets, and a further Rs3,200 crore is being raised by domestic funds to buy office projects. India’s first REIT will also be launched by the end of the year and raise Rs6,000 crore.

The frenetic investments and deal activity in India’s commercial real estate business contrast starkly with flagging sales and stagnant prices in the residential real estate sector.

In August, India’s largest listed real estate firm DLF Ltd said its promoters would sell their stake in its rental arm for Rs11,900 crore (the deal involves selling a 33.34% stake to an affiliate of GIC Real Estate, Singapore, for Rs8,900 crore and the buyback of preference shares for another Rs3,000 crore), in what is perhaps the largest foreign direct investment in the sector.

“We have created a private trust and the idea is to grow the portfolio (currently 26.9 million sq. ft), which has the potential to be doubled,” said Saurabh Chawla, senior executive director-finance, DLF.

Embassy Office Parks, a partnership between realty firm Embassy Group and investor Blackstone Group Lp, will launch its REIT by December to monetize its portfolio.

The partners plan to file a draft red herring prospectus by the end of September, Embassy chairman Jitu Virwani said.

The Embassy REIT, which aims to raise around Rs6,000 crore, was the first one to be accorded registration with the Securities and Exchange Board of India (Sebi) in July.

The success of the Embassy-Blackstone REIT is crucial because it will lend confidence to other investors and developers eyeing REITs.

Meanwhile, other companies and funds are planning to expand their presence or build their portfolios.

RMZ Corp. is strengthening its position as a prominent “Grade A” commercial office space provider by strengthening its presence across important cities.

“We plan to raise $1 billion and invest through the RMZ Office Development Fund to grow our assets under management from 21 million sq. ft to 60 million sq. ft over the next five years,” said Arshdeep Sethi, managing director- executive management, RMZ Corp.

RMZ Corp.’s rental income is about $200 million and will likely grow at a compound annual growth rate (CAGR) of 30%, Sethi said.

The money will be raised partly from RMZ’s existing investor and shareholder Qatar Investment Authority and partly from other funds.

RMZ is talking to sovereign funds, including Canada Pension Plan Investment Board, said a person familiar with the transaction who asked not to be identified.

Once the portfolio reaches a certain size, RMZ may launch a REIT sometime next year, this person added.

Xander Group Inc. plans to ramp up its office portfolio after having invested more than $400 million already.

“We currently have around 6 million sq. ft of office in our portfolio, of which 4 million sq. ft is leased and generating income and 2 million sq. ft is under development. We also have a strong pipeline of acquisitions that is under diligence, of another 8 million sq. ft, where we plan to invest $350 million in the next 12 months,” said Rohan Sikri, senior partner, Xander Investment Management Pte Ltd, the real estate private equity arm of Xander Group.

Xander and Dutch pension fund asset manager APG Asset Management NV bought an information technology special economic zone in Chennai for $350 million earlier this year.

Three factors are driving interest in commercial real estate-demand, while lower than last year, is still high enough; rents have been steady; and there’s a shortage of premium office space in the big cities.

Supply of office space across eight major cities fell by nearly 50% in the first half of 2017, compared with the same period last year, property consultant Cushman and Wakefield said in its half yearly report in July.

It termed the fall in supply “one of the biggest declines in the last five years”.

“There is a dearth of good supply in most markets and we are seeing reasonable demand wherever we are building,” said Vinod Rohira, managing director and chief executive, commercial real estate and REIT, K Raheja Corp.

Blackstone bought around a 15% stake in various office projects of K Raheja Corp. for around $250-300 million this year.

K Raheja Corp. has 20 million sq. ft of office space earning rent, and plans to add another 15 million and may go the REIT way in the future.

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