Mumbai: Large property investors are scrambling to buy commercial towers where tenants have moved in, driving up the capital value of these buildings. However, with rentals failing to catch up, returns from these investments have fallen, real estate brokers and advisors said.
Stiff competition among sovereign wealth funds and large private equity funds for scarce assets has pushed up the capital value of commercial properties at prime locations in Mumbai and Delhi by over 30% in the past five years, real estate advisors and developers said. This has led to rental yield, a measure of rental income earned against the cost of the asset, falling to about 8% from 11% seen five years ago in top real estate markets.
“Demand for pre-leased office assets is very high. A good commercial asset with great tenants can get sold in 48 hours. That’s the level of demand. I just fear there are fewer products available in the market now as there are more buyers than sellers,” said Anuj Puri, former chairman and country head of JLL India, a property consultant.
With the opening up of foreign direct investment (FDI) regulations and the possibility of listing real estate investment trusts (REIT), demand for office leased assets has shot up in the past two years, particularly from global institutional investors, domestic funds and ultra-high networth individuals looking for a stable cash flow.
For instance, in prime locations such as Mumbai’s Bandra Kurla Complex (BKC) and Lower Parel, rental yields have fallen to 8.46% and 9%, respectively. Five years ago, yield in these places ranged 11-12%, as per data compiled by real estate analytics firm CRE Matrix.
According to JLL, India’s top seven cities house over 400 million sq. ft of office space which are already leased out. Of this, around 50% have single ownership—the segment most sought-after as they are easier to buy than those with multiple owners, said Ashutosh Limaye, research head, JLL India. However, a big chunk of it is already bought out or is in the process of acquisition by large global funds such as Blackstone Group LP, GIC Pte and Brookfield Asset Management.
Last year had seen some of the largest deals in the office leased space. Canada-based Brookfield agreed to buy Hiranandani Group’s entire 4.5 million sq. ft office leased portfolio in Mumbai’s Powai suburb for $1 billion.
Qatar Investment Authority (QIA)-backed RMZ Corp., a Bengaluru-based commercial real estate firm, is also in the process of acquiring Essar’s Equinox 1.25 million business park, for Rs2,500 crore.
Last week, DLF Ltd said it will enter into an exclusive deal with Singapore-based sovereign wealth fund GIC Pte. Ltd to sell a 40% stake in DLF Cyber City, which owns about 26.8 million sq. ft of leased commercial real estate assets.
Blackstone, which is India’s largest office space owner with over 30 million sq. ft, is gearing up to launch the country’s first REIT this year, along with its Indian partner Embassy Group.
“Most stocks are already tied up or in the process of tying up. The market is becoming smaller. Large good assets with reputed developers are already off the market. Now, we have to look at individual developers with decent portfolio and who are looking at diluting in a couple of years,” said Thirumal Govindraj, managing director (management), RMZ Corp.
He said the company prefers to buy leased assets mostly in Delhi and Mumbai, even as it is scouting for fresh opportunities in other tier-II cities.
RMZ owns about 21 million sq. ft of fully leased office assets and is also looking for a Rs9,000-crore REIT listing.
“In 2008, there were hardly any properties which could REIT because the laws were very stringent. Now, with more funds coming into the market, you are left with hardly any assets. Big parts have already been taken over. There is less assets available for trade. Office market is at an all-time high right now,” said a senior official with a large office real estate firm, on condition of anonymity.