Bengaluru: Piramal Fund Management Pvt. Ltd, one of the largest lenders and investors in residential real estate, will start funding commercial office projects on the back of a steady growth in the segment even as a prolonged slump in residential sales continues.
The investment arm of the Piramal Group, which already has a loan book and equity investments worth Rs.22,000 crore in the residential space alone, plans to deploy another Rs.5,000 crore in commercial office projects in key property markets such as Mumbai and Bengaluru.
Just as it operates in the residential sector, Piramal will offer capital in all forms such as construction finance, structured debt and in some cases, equity for office developments.
“We are extremely bullish on the commercial segment. Typically, most developers who perhaps were focusing on residential development in the aftermath of the (2008) crisis have now realized that there is an imbalance building out in the supply and availability of Grade A office space. It is therefore an opportune time for these developers to start or revive greenfield commercial development and we are naturally looking towards funding the same,” said Khushru Jijina, managing director, Piramal Fund Management.
As per estimates of real estate advisory firm JLL, office space absorption in India during 2015 stood at 35 million sq. ft—the second highest after 2011. Vacancies in premium buildings, particularly in Mumbai, New Delhi and Bengaluru, stand at around 8-9% while overall vacancies in India are at 16%.
While global investors such as Blackstone Group Lp have over the past few years steadily built a large real estate portfolio in India by buying office assets, 2016 will see a new pipeline of office projects coming up. So far, developers have been borrowing from banks to build such projects at relatively low interest rates of 11.5-12%.
Piramal’s decision to enter the office segment, particularly to back early-stage greenfield and under-construction projects, is a timely strategy when there is significant demand for capital by developers with a development pipeline and need different kinds of capital.
“Piramal will have the first-mover advantage with this, and it will be interesting to see how they compete with banks on the cost of lending. They have structured and packaged their product accordingly, and may be introduce sweeteners such as flexibility on security or higher moratorium on repayment. Office space demand is picking up and it is a relatively safer option than residential today,” said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India.
Bank lending in office projects happens through a two-stage process, said Jain. There is construction financing at an early stage, which is slightly more expensive because there are construction-related risks. There is also a lease rental discounting model of financing, a slightly longer-term funding, where the project becomes rent generating and developers repay from those lease rentals. This comes slightly cheaper at 10.75% or so.
“There is no doubt that there is good demand for money to develop office projects. While bank lending is available for many developers, there are some who would want alternate sources of capital,” said Jitendra Virwani, chairman of Bengaluru-based Embassy Group, which has a large office development arm Embassy Office Parks.
Piramal’s Jijina said that, similar to the growth in the residential-focused construction finance book, the firm’s differential edge largely comes from adopting customized repayment schedules, staggering payments and flexibility in interim interest servicing, which tend to go a long way in making the product more attractive for developers than bank financing.