Reliance AIF to raise Rs1,000 crore office fund

Bengaluru: Reliance AIF Asset Management Co. Ltd is raising a Rs1,000 crore rental yield fund, its first initiative to buy and own office projects. Besides Reliance AIF’s fund, two more such office investment funds are expected to launched this year.

Reliance AIF, a unit of Reliance Nippon Life Asset Management Ltd, launched the fund in January and is looking at investing in high-quality assets in key cities that will generate regular rental income and capital appreciation on exiting the property. 

The fund that will raise capital from domestic and offshore investors comes amid a prolonged slowdown India’s real estate sector, with weak residential sales and uncertainty over recovery. However, steady lease rentals, good absorption levels, inadequate supply and global investor interest have breathed life into the commercial office sector.

“There are no development risks attached to owning and leasing out Grade A commercial office assets. This is a large and growing asset class and there are enough opportunities. The attractiveness is that this asset class offers periodic rental income typically higher than that generated on bonds, along with significant potential for capital appreciation on exits. This is an opportune time for capturing potential upside on office assets,” said Shahzad Madon, head of portfolio management services and alternative assets at Reliance Nippon Life Asset Management.

The Reliance Rental Yield Fund is a 4-6 year fund that will buy or fund pre-leased, rent generating properties. It targets a rental yield of 7.5-8.25% per annum and a gross internal rate of return (IRR) of 12-16% at a fund level, including capital appreciation on exit.

Reliance already has a strong pipeline of transactions and is expecting to do the first closing shortly, around the time it will also start deploying the capital, Madon said. 

The new fund will have the first-mover advantage, even though there is a pipeline of more office funds coming up later this year, analysts said.

After the economic slowdown in 2008, developers gave up capital-intensive office projects and shifted focus to the residential market, which seemed a safe bet at the time. A number of large apartment projects came up in the next few years, resulting in a glut in the market and another slowdown in 2012-13.

Madon said it’s a good time to invest in office properties, with valuations being reasonable and prices not having gone up.

“The commercial office sector is in the cusp of a recovery,” he said.

“Though demand is in excess of supply of office space today, there is a good pipeline of projects with developers looking to build new office projects again. Not just the top few cities, but Hyderabad is back on the radar and even a market like Navi Mumbai attracts good demand for new office space,” said Shashank Jain, partner, transaction services at PricewaterhouseCoopers India.

If all goes well, 2017 will also mark two significant events in commercial real estate. DLF Ltd’s stake sale in its commercial property arm, DLF CyberCity Developers Ltd, to institutional investors, is expected to be concluded and Embassy Group and Blackstone Group Lp may go for a real estate investment trust (REIT) listing.

Reliance AIF is currently also raising a Rs1,000-crore residential fund from Indian and overseas investors. The fund, launched last year, will invest through structured debt in mid-income housing projects across cities.

Over the last four years or so, Reliance, both through the alternative investment fund and portfolio management services (PMS) route has raised Rs2,600 crore for real estate investments, have done 52 transactions and exited 24 of them. It has returned around Rs1,600 crore to investors.

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