PSUs’ office assets have REIT potential of over INR 1.2 trillion: Knight Frank India
MUMBAI: Knight Frank India, a leading property consultancy, in its latest research report – ‘Investments in Real Estate – Trends in PE Investments – Q3 2020’ recorded that Indian real estate attracted private equity investments of USD 2,308 million, across 11 deals in Year to Date (YTD) 2020 (January 1, 2020 – September 30, 2020). Of the total PE investments in real estate, the office segment attracted the largest share of USD 1,871 million, claiming 81% share, followed by warehousing at 10% and residential with 9%.
Shishir Baijal, Chairman and Managing Director, Knight Frank India said, “Private equity investors have taken advantage of this period of economic slowdown to scout for Grade A assets with strong growth trends for investments. As a result of which, assets in the office segment saw positive investment activities. The average deal size for office investments was also seen to be remarkably higher in YTD 2020 as compared to full-year 2019. Globally, we see investors assessing the resilience and growth momentum of economies to make large scale investments. India’s economy, though impacted, is expected to see an accelerated recovery in the next few months.”
Rajani Sinha, Chief Economist & National Director – Research, Knight Frank India said, “We have witnessed healthy investor interest in the office segment despite the slowdown this year. While the investors are currently cautious due to the disruptions in the real estate sector and the sharp economic slowdown across global economies, we feel that the investor, interest in Indian real estate will remain strong in the long term.”
The report also assesses the assets owned by the Government of India’s Public Sector Units (PSUs) and estimates that the top 45 companies hold commercial properties viable for Real Estate Investment Trust (REIT) at a potential of over INR 1.2 trillion. This is based on an analysis of the book value of buildings owned by 45 listed PSUs including top Maharatnas, Navratnas, mini-ratnas, PSBs, and other PSUs. Office building assets on the balance sheet of these 45 listed PSUs were considered for this analysis and the residential buildings/townships and plant buildings (buildings inside the plants) were excluded. The report highlighted that the quantum of the REIT potential can be significantly higher than INR 1.2 trillion if the office buildings of the 45 PSUs have valued on a market value basis and also with the addition of office assets of other listed PSUs along with the office assets of the unlisted PSUs which are under the direct ownership of the central government. The PSUs have raised funds at higher rates through bonds/NCDs over the past two years compared to the possible yield which can be offered by GOI PSU REIT and the yields offered by the two listed REITs trading currently.
Shishir further added, “The first two REITs of India have been immensely successful and garnered strong investor interest. The potential of the office space market in India has been fundamentally strong given the generic pace of growth of the economy and the demand. Thus, on a mid-term to long-term basis investment in the asset class is expected to be positive. This may therefore be a good opportunity for the Government to monetize the rent yielding office assets of PSUs.”
Big ticket investors bullish on annuity assets, commit substantially higher risk capital
PRIVATE EQUITY INVESTMENTS: THE RISE IN PREFERENCE VIA EQUITY ROUTE
In recent years, PE investors have been aggressively committing equity capital to rent yielding commercial assets. In addition, investors have gone slow in their investments in residential which was done predominantly through the debt/structured debt route. Consequently, the share of equity investments since 2017 has dwarfed that through the debt route.
Trends in Private Equity Investments in Office Assets
The office market remains a preferred segment for investors due to the strong fundamentals of the Indian office market. Since 2011, the segment has garnered USD 15.4 billion of equity investments, and during YTD 2020, the segment garnered an 81% share of total PE investments, with four deals amounting to USD 1,871 million. Around 18.1 mn sq ft of the office was transacted in YTD 2020. Out of the USD 1.87 billion of investments in 2020, USD 1.64 billion was a part of a large office deal. The PE investments in office segments were down 31% YoY in YTD 2020 compared to USD 2.7 billion during the same period last year.
In 10 years, Jan 2011 – September 2020, Mumbai took the largest quantum of office investment worth USD 5,015 mn followed by the National Capital Region (NCR) with USD 2,803 mn and Hyderabad with USD 2,010 mn.
Note – * represents investments in a single deal
Trends in Private Equity investments in Warehousing assets
In YTD 2020, the warehousing sector attracted PE investments worth USD 221 million which were 86% YoY lower compared to USD 1,538 million during the same period last year. This drop can largely be attributed to a significant percentage of capital which was committed to the warehousing sector in India over the past three years awaiting deployment. However, global investors are expecting the warehousing segments to emerge stronger from the crisis driven by the renewed demand from e-commerce segments due to lockdown and have been taking up positions in warehousing assets.
Trends in Private Equity Investments in Residential Assets
In YTD 2020 (Jan-Sept 2020), the residential sector witnessed only three deals worth USD 216 million, which were down 67% YoY compared to USD 659 million during YTD 2019. For several years residential prices have been stagnant and have even corrected at certain locations. However, the cost of input for developers has not corrected to the same extent and has increased for many items including land prices, labor cost, cement and steel cost; the construction charges, and approval costs. On the other hand, the sales velocity has come down compared to the peaks of the earlier period which has dented the profit margins of developers and lowered the Internal Rate of Return (IRR) from residential projects. On account of all these factors, investors have slowed down their investments in residential projects.
RESIDENTIAL: THE CHANGE IN PREFERENCE FROM EQUITY TO DEBT
To avoid the risks associated with development projects investors have been reducing their equity exposure to residential real estate and have been investing through debt or structured debt instruments.
Trends in Private Equity Investments in Retail Assets
In 2020, there were no investment deals in retail space. The pandemic-induced lockdown had forced all malls to halt their operations and this has adversely affected their businesses. Investors are fearing that the virus is likely to keep consumer footfalls low even after the reopening of malls across India. Further, to give some relief to tenants, several mall owners in India had announced a partial/full rent waiver for the lockdown period despite having to take a significant financial hit. This partial waiver has been extended for the rest of the financial year in some cases: –as the mall owners have waived-off a portion of the minimum guarantee (or fixed portion) of rent and opted for a higher percentage of revenue shares to avoid vacancy in their asset. Such high levels of uncertainty have kept investors away from retail assets.
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