Shortage of commercial realty prompts global funds to target greenfield projects
Mumbai: Scarcity of fully built office towers and retail complexes for sale, as well as intense competition for the few on offer—have prompted many global real estate investors to consider investing in such projects from the early stages of development itself, property consultants and advisors said.
In the last couple of years, large private equity funds such as Blackstone Group Lp, Brookfield Asset Management, Inc. and Canada Pension Plan Investment Board (CPPIB) have bought up a large chunk of leasable commercial real estate in prime locations, leaving little for new investors.
“Availability of individual Grade A commercial real estate is limited as most of the marquee assets are either aggregated with large developers/ private equity funds or strata sold, as is the case in Mumbai. Alternatively, partnering with large developers via acquisition of stake in their commercial assets holding vehicles is emerging as one option for newer core funds entering India,” said Ashwini Kumar Mathur, head (real estate) Mirae Asset Global Investments (India) Pvt. Ltd.
Such investments could give immediate scale to investors as well as provide an exposure to the development pipeline of the partner company, he said.
The South Korean company has already announced $500 million investment to buy commercial leased properties as part of its plan to enter India.
According to Anckur Srivastava, chairman, GenReal Property Advisers, stiff competition has led to innovative strategies. “For one asset, there would be about 12 bidders, leading to price touching illogical numbers. Funds have started adopting strategies like forward purchasing, where the investor would invest money in a greenfield project being built by a developer and as soon as the building is fully leased, the investor buys out,” he said.
Earlier this year, the CPPIB announced investment of around $250 million in Island Star Mall Developers Pvt. Ltd, a unit of Mumbai-based Phoenix Mills Ltd.
The funds will be used for acquiring and developing both greenfield assets on newly purchased land banks, as well as existing operating retail assets. CPPIB did not respond to email queries.
“A lot of capital is chasing just a handful of good commercial properties. So, investors are now willing to increase their risk appetite by taking some amount of development risk and get into unique and structured deals with developers,” said Ashish Singh, managing director (real estate investments), Standard Chartered Private Equity Advisory (India) Pvt. Ltd. Two years ago, Standard Chartered and Tata Realty, a unit of Tata Sons Ltd, formed a Rs3,000 crore investment platform to buy commercial assets. The platform recently bought a 47.5-acre plot at the Thane-Belapur industrial area near Mumbai for Rs325 crore, to develop around 6.5 million sq. ft of commercial office space.
Declining to comment on any specific transactions made by the platform, Singh said that lack of supply of prime commercial ready assets has been the biggest challenge and this has triggered the search for more ground-up development.
According to Rohit George, managing director of Virtuous Retail South Asia Pte. Ltd (VRSA), the retail arm of the global investment firm Xander group, retail assets that are still available have become more expensive, as many investors are chasing the same property.
“There is little available right now in terms of existing high-quality retail assets, but having said that, our strategy is multi-fold. If we like something that is currently operating, we would buy, but the opportunity set is very limited. So, more of our growth is going to be through greenfield and brown-field projects,” George said. VRSA’s India retail portfolio stands at around 5.5 million sq. ft. spread across Chandigarh, Surat and Bengaluru. Of this, 2 million were purchased outright, while the rest were developed by the company.
“There is a supply challenge (of premium commercial assets) in India. In order to get hold of the stock they would like to own for their exposure in the country, foreign investors have to continue to partner with the best-in-class developers to help create the supply,” Richard Bloxam, head of global capital market at international property consultant JLL said in an interview last month.