PE funds face shortage of investible Grade-A office assets

NEW DELHI/BENGALURU: Several top PE firms and other investors have bought income-producing office assets across the country but the easy pickings seem to have run out.

While their appetite remains intact, funds are faced with a shortage of good quality investible office space, and there seems to be a mad rush for what’s left.

The biggest deal in the market today is the sale of DLF promoters’ 40% stake in the 26.8 million sq ft DLF Cyber City Developers and several large institutional investors such as Blackstone, Qatar Investment Authority, GIC, Brookfield Asset Management, Temasek, Canada Pension Plan Investment Board, Warburg Pincus and Kotak Realty Fund are expected to show interest in buying the stake.

Many of these funds have picked up rental assets over the last few years.

Blackstone, for instance, now holds over 30 million sq ft of completed office space on its own and through its JVs with Embassy and Panchshil.

But as most builders dropped plans to build office space in the last three to four years to focus on building residential projects, the market is facing a shortage of space.

New projects have started now as demand for office space has improved among corporates.

These new offices, however, will take a few years to come on board.

“These large investors are looking for a portfolio of assets. They are also looking for pedigreed developers.At the moment though it is hard to find a combination of the two,” said Ashutosh Limaye, head of research & REITs at property advisory firm JLL.

The latest high-value transaction in this space is the acquisition of Hiranandani Group’s office and retail space in Mumbai’s Powai area by Brookfield Asset Management for around 6,700 crore.

Nitesh Shetty, managing director of builder Nitesh Estates that has formed a $250-million platform with Goldman Sachs to invest in income-producing commercial real estate in India, says there is a lack of quality commercial developments in the market today.

“Whatever properties that are coming for acquisition have some caveat or litigations attached to them. Sellers are asking for a 7% cap rate. There is too much money chasing the same deals, which does not make sense,” said Shetty.

Arshdeep Sethi, managing director, development at Bengaluru based builder RMZ Corp, has a similar view. “Today in India there is a limited availability of core Grade-A commercial properties.With top global investors with access to large amounts of capital eyeing a slice of the pie in Indian real estate, we see the dance of economics being played out, with cap rate compression being the name of the game. The prevailing cap rates are firming up to levels that are pricing deals out of the market,” said Sethi.

This shortage of good quality investible office space is already pushing funds to look at taking a bit of development risk that they have so far been vary of, said Anckur Srivasttava, chairman of GenReal Property Advisers.

“The investments so far were the low hanging fruits. Many of these assets were bought at less than depreciated replacement cost. Now it might not be so easy for them,” he said.

Some funds are finding an opportunity in smaller assets.

Milestone Capital Advisors, which is currently raising a 1,000-crore fund to invest in commercial property , is looking at the commercial assets of other mid-sized developers where the entry is at 10-11% cap rate.

“We don’t want to compete with the likes of Blackstone and GIC on large assets.There is no point in competing for fully-priced assets where the entry cap rate is 9-9.5%,” said Rubi Arya, executive vice chairman at Milestone Capital Advisors.

While Milestone might not want to take the development risk that comes with building new assets, it is looking at builders who require last mile funding to complete the final 1015% of assets. “Here the entry would be cheaper for us,” said Arya.

Credits ET Realty

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