Commercial Realty Projects Find Favour With Private Equity Firms

The slow economy in the country has put many private equity (PE) firms on the back foot. Several PE firms are in a fix whether to invest in residential projects in the country. However, commercial projects are finding favour among PE investors. The value of PE transactions saw an increase of 26% this year during the period of January to September, in the country’s real estate sector.

According to a report from Cushman & Wakefield, the value of private equity transactions in the real estate sector this year rose to Rs. 4,700 crore in the last nine months.

Investment boosts in commercial real estate

According to the report, investments have increased in leased income-generating office properties. Total investments in office space in the last nine months increased to Rs 2,476 crore. This is more than double of the investments made during the same period in the last two years. Over Rs 7,667 crore was invested in the commercial office space segment since 2011.

The main reason for this is the improving market sentiments. Real Estate Investment Trusts (REITs) are expected to become a reality soon. This has created optimism among developers. Several investors are finding these deals appealing as they can offload some of their assets and can get exits. The availability of an exit mechanism to investors is expected to improve the investment activity further in commercial realty.

Another reason is that when it comes to rentals, commercial assets usually give yield of an average of 9% compared to 3-4% in case of residential property. A higher annual capital appreciation compared to residential real estate is an added advantage. For example, a commercial office space in a locality such as Lower Parel in Mumbai gives a rental yield of almost 12-16%. Similarly, office space for outright sale is available for Rs. 13,000-16,000 per sq.ft in Lower Parel. There is a high demand for office spaces in such localities.

Leased office buildings offer more yield

Leased office buildings has contributed 53% of overall investments in 2013 compared to 30% in 2011 and 36% in 2012. This has increased the investor interest in this sector over the last few years. Not only offshore funds, but domestic capital allocated for office properties is also being deployed in this sector.

Good time for deals

According to experts, this is a good time for deals between PE investors and builders. Developers with good assets on their balance sheet are looking for funds, and the investor can get a valuation and entry point. The deals done now are easing the liquidity stress on developers.

There are about 400 million sq.ft of pre-leased commercial assets across the country. While all of these may not be suited for an investors’ interest, even if a certain portion is considered, it is a big opportunity for investors.