Bangalore: Investors are returning to real estate in interesting avatars after a hiatus of a year-and-a-half. Many of them have sold properties at high prices in recent times on the back of a recovery, and are now eyeing fresh projects to put their money in.
They are primarily long-term players, many of them rich individuals looking at mid-priced and premium residential projects in metros such as Mumbai, Delhi-National Capital Region and Bangalore, said property analysts.
Jones Lang LaSalle Meghraj, a property advisory, said in its March global market perspective report the previous two months saw high networth individuals (HNIs) as new investors in Indian real estate.
Their return spells relief for the sector. The investors are looking at long-term opportunities with a lock-in of two-three years, mainly in residential projects. But they are still steering clear of commercial and retail projects such as office buildings and malls—these segments being slow to recover.
New trend: An artist’s rendering of Millennium Spire’s commercial project in Manesar, Gurgaon. The firm is offering to pay rent to investors for up to three years after handing over the properties.
In a residential project near Electronic City, a business hub in Bangalore, a group of around 10 individual investors recently bought 30 apartments, each priced at Rs40 lakh on an average, through a special purpose vehicle (SPV). To ensure assured returns for them over a period, the developer appointed LJ Hooker India, a property advisory, as an intermediary to structure steady rental income from the apartments.
“The SPV would also look at other projects, and in Bangalore, where apartments are available at the Rs40-50 lakh category; they are attractive investment options,” said Alexander Moore, managing director, LJ Hooker India, but didn’t disclose the developer’s name, citing a confidentiality clause.
Bulk buying of apartments is good news for developers, said Farook Mahmood, chairman and managing director of Silverline Group, a Bangalore-based property advisory.
Several developers are stuck with unsold inventory because of the slowdown last year. According to Mumbai-based realty research firm Liases Foras, the Mumbai metropolitan region alone has 82 million sq. ft of residential inventory, of which 20% is ready stock.
“Investment vehicles such as SPVs are similar to buying shares in a company. If an investor in an SPV wants to exit, he can simply sell his stock to another investor,” explained Mahmood, who said he has inked multiple bulk deals in recent months through SPVs.
These investors are different from speculators who ruled the property markets until the end of 2008, who would typically invest in a project and look to exit in 6-12 months after making a profit, said analysts. This has changed now as developers are incorporating longer lock-in periods in sale agreements, discouraging hasty exits. But they are also pushing the envelope to draw investors, particularly to commercial projects.
Millennium Spire India Management Pte Ltd, for its flagship commercial project in Manesar, Gurgaon, is offering to pay Rs55 per sq. ft as rent to investors for up to about three years after handing over the properties. Earlier, developers would offer to pay rent to investors till the property was handed over and could be leased to offices.
Indian office space vacancy rates, which currently stand at 17%, are set to increase sharply due to massive supply, Jones Lang LaSalle Meghraj said in its report. Vacancy rates in suburban markets are expected to breach 30% in the near term.
According to a March wealth report by Knight Frank India, a property advisory, and financial services firm Citigroup Inc., the number of HNIs in India is growing by 20% every year, second only to Singapore.
Developers are using investors to complete acquisitions or fund construction against which they are pledging both ready and under-development properties at steep discounts.
“Investors are coming in to the rescue of many developers, who need urgent equity and are pledging properties to them at steep discounts and offering high returns for a period of two-three years,” said Amit Goenka, national director (capital transactions), Knight Frank India.
Pujit Aggarwal, managing director, Orbit Corp. Ltd, a Mumbai-based developer, said such investors almost function as private equity lenders. “They charge high returns and will flip the product once it is ready.” At least 25% of Orbit’s properties are currently held by investors.