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Private equity majors bet big on commercial assets

Experts point out that funds are smartly mitigating their risks by investing in 'ready to move in' commercial spaces rather than parking money in projects starting from scratch.

twitter-logo Sarika Malhotra        Last Updated: June 3, 2013  | 16:56 IST

The recent buzz around private equity (PE) funds acquiring majority stake in Vrindavan Tech Village, the large IT park on the outskirts of Bangalore, underscores how investment in commercial property is fast becoming an attractive investment option for PE funds investing in real estate.

This $368 million investment by a clutch of realty PE funds, including Blackstone Real Estate Partners, Embassy Property Developments, GIC Special Investments, and HDFC Property Fund, was the most significant deal in the January-March quarter, according to VCCEdge data.

Again in March, Blackstone invested $82.6 million in Eon Free Zone, a special economic zone (SEZ) near Pune, developed by Panchshil Realty, a Pune-based real estate company.

Commercial assets are largely being pursued by foreign PE funds targeting both core and core plus returns secured by a stable stream of cash flows. Many of them, such as Blackstone are investing in 'ready to move in' commercial spaces.

Experts point out that funds are smartly mitigating their risks by investing in these properties rather than parking money in projects starting from scratch.

Shobhit Agarwal, Managing Director, Capital Markets, Jones Lang LaSalle (JLL), confirms that from a classic PE standpoint, 'ready to move in' offices make for good investment. "Most of these buildings started construction in 2006/07 and are ready for delivery now. They make for great investable grade (since they have) single titles and very good tenants. They are therefore are attractive for foreign buyers. Such deals are allowed in SEZs and industrial parks."

India absorbs around 40 million square feet of office space annually, says a JLL estimate.

In 2012, Blackstone bought 50 per cent stake in a Bangalore builder-owned portfolio of three business parks for $200 million. The three commercial properties - Embassy Golf link and Manyata Embassy Business Park in Bangalore, and Embassy Tech Zone in Pune -  have a total area of over 10 million sq ft.

PE firm Red Fort Capital, too, has a couple of investments in prime commercial assets - one in Bangalore, the IT park called Prestige Exora Business Park, and another on Delhi's Bhai Vir Singh Marg, being built by Parsvnath Developers.

One of the latest PE entrants in real estate has been Baring Private Equity Partners. After examining many opportunities, Baring's maiden investment made in 2012 has been the $100 million it injected in RMZ Corp - a well known South India-based builder - for an estimated 28 per cent stake. RMZ already has close to five million sq ft of built and leased office space. The proceeds from Baring's investment will be used by RMZ to add another six to seven million sq ft.

An 11 to 12 million sq ft of income yielding portfolio will be a sizeable proposition. Experts confirm Bangalore rentals are steady and the absorption rate is high.

Baring is investing out of its India-focused Baring India Private Equity Fund III, worth approximately $600 million. Since it is a multi sector fund there is no specific allocation for the real estate sector.

Varun Batra, Partner, Baring Private Equity Partners says: "Baring has been studying the real estate sector for over two years now and after due consideration is selectively investing in this space. The need for housing and commercial space is quite obvious, and we will be investing primarily in the residential and commercial segments. We will also look selectively at the hospitality sector."  Batra adds: "We would prefer to focus on sustainable themes in markets that are not speculative or purely investor driven."

JLL's Agarwal notes that with big PE funds buying these assets, exits will become increasingly easy for office investments.

Some international limited partnerships (LPs) - sovereign funds or pension funds - are also interested in buying these core assets, as foreign investors have different pockets of funds, one for development of assets and one for yield generating assets.

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