PE firms catch a fancy to iconic Mumbai properties

With just a month left, 2013 will go down as the year of iconic properties (on sale) in Mumbai, which caught the fancy of global private equity (PE) investors.

To begin with, the 40-year old Express Towers -- commissioned by the legendary press baron and freedom fighter Ramnath Goenka -- in Nariman Point in south Bombay, is changing hands for a whopping Rs 900 crore to American PE fund Blackstone with its portfolio company, Panchshil Realty from Pune, who will buy out the existing owners, the Express Group and ICICI Ventures.

Next is Cadbury House in Peddar Road, again in South Mumbai, which remained the chocolate maker's headquarters for almost six decades; it has reportedly been sold for Rs 350 crore to diamond merchant Dilipkumar Lekhi. Cadbury House in SoBo (formerly south Bombay) area is spread over 1.1 acre land with a saleable area of about 62,000 square foot.

Citibank has decided to put out its old headquarters having an 84,000 sq ft area in Mumbai’s Bandra-Kurla Complex for sale and has appointed CBRE group as its consultant, while unconfirmed reports put the possible deal size of Citi Centre at Rs 300 crore.

With Express Towers coming in its fold, Blackstone is keen on lapping up as many marquee properties as it could lay its hands on. In this context, Knight Frank India director Viral Desai says: "This is a great time for PE funds to lap up commercial properties as rents are low now and bound to go up once business sentiment improves."

Experts, reports suggest, are betting on a revival in this sector as the office space segment seems to have bottomed out. 

PwC Associate Director Bhairav Dalal says there is huge investor interest in buying stabilized and high-yielding assets, which are available in India’s financial capital.  Dalal is of the view that investors are interested in properties which are leased out and have a good track record. These properties are generally iconic, says Dalal, adding, “We expect to see such deals happening in the near future as well.”

An agency report pointed out last week that Canada Pension Plan Investment Board (CPPIB) plans to invest $200 million to acquire 80 per cent stake in a joint venture with Shapoorji Palloji Group to buy realty assets in India.  This JV is to invest in leased, income-producing office buildings.  Currently, Shapoorji Pallonji operates information technology parks and it has IT parks and SEZs in Chennai, Gurgaon, Manesar, Mohali, Nagpur and Pune, with 4.6 million sq ft of space where it plans further expansion.

CPPIB is not alone in such pursuit; Singapore-based commercial space developer Ascendas Pte Ltd on November 19, 2013 launched the Ascendas India Growth Programme, targetting an asset size of over Rs 3,000 crore to invest in commercial space in major Indian cities.  In fact, Singapore's sovereign wealth fund GIC Private Ltd  is a principal investor in the programme.

Venture Intelligence, a research firm tracking private-equity investments in India, show that PE giant Blackstone and HDFC Property Ventures invested about $367 million (Rs 1,951 crore) in Bangalore-based Embassy Group in February in the current calendar period by picking up 50 per cent interest in its rent-yielding office portfolio of 13.5 million sq ft.

Blackstone PE firm is competing with Singapore's government sovereign wealth fund to buy Unitech's 3.6 million sq ft industrial park in Gurgaon, south of Delhi, for about Rs 2,600 crore.  It is also in final stages of discussion with HCC Real Estate and Milestone Capital to buy office park in Vikhroli, a north-east Mumbai suburb, for Rs 1,000 crore.  It is also in the reckoning to buy a large stake in Bangalore’s Vrindavan Tech Village with 2.1 million sq ft of tentative office space, with potential to develop another 10 million sqft.

Let’s face it. Most of the deals in the commercial realty segment is taking place where there is land parcel.  These parcels are predominantly used for redevelopment purpose with some exceptions, like in the case of Cadbury House, whose buyer plans a mixed-use development that will have two towers with one dedicated for residential, says Knight Frank Executive Director Rajeev Bairathi,  adding, “There are many such deals in the pipeline.”

The trend is not specific to south Mumbai, it is happening in suburbs like Powai, Thane and across the country selectively, where sellers want to monetize non-core or non-productive assets, says realty consultant Rupesh Singh. However, Air India’s recent attempt to monetize its 22-storey headquarters – next only to Express Towers – received only little success with Tata Consultancy, State Bank of India and just launched Mahila Bank being prominent tenants there.

This may be a temporary phase, as Nariman Point, being an established Mumbai CBD (central business district), whose property valuation is greater that of America’s Manhattan, buildings like Express Towers, Air India are uniquely positioned to take advantage of an economic recovery, says Singh.

Notwithstanding the declining trend in rentals, Blackstone’s appetite signals a maturing Indian market for rent-yielding assets, mirroring a global trend where many iconic commercial buildings are now owned by financial investors, including private equity and pension funds.

So much so, Blackstone’s India headquarters is in the same building (Express Towers), along with fellow PE companies Warburg and General Atlantic, besides consultant McKinsey.  The deal, however, excludes the top-floor penthouse of Indian Express Chairman & Managing Director Vivek Goenka, restaurants owned by members of the Goenka family and Express Group offices.

In the past two years, Blackstone has spent over $600 million controlling nearly 21 million sq ft of office buildings – next only to developer DLF, which as of now has over 27 million sq ft of office space that are already tenanted or nearing a lease deal. It has another seven million sq ft of development potential in the existing assets, making it the most significant consolidator of Indian work spaces with annual yields ranging between 10-15 per cent.

 Currently, India’s total grade A office space is estimated at over 360 million sq ft.
Even though rental yields from properties in India may not be that impressive, a senior consultant at a Mumbai-based consultancy says in emerging economies, investors pump funds into real estate for high return from capital appreciation and not for rentals.

Interestingly, rental yields – the annual rate of return through rental income from a property at the current price – are higher than those in emerging nations.   If one compares rental yields, which are equal to the interest earned on bank fixed deposits, they offer far superior returns.

For instance, in New York, rental yield is almost six times the return from bank fixed deposits.  In Tokyo, while the fixed deposits is around 0.20 per cent, the rental yields are in the range of around 4.7 per cent.  In India, however, the rental yield is almost 30-40 per cent of the fixed deposit rates. This should explain global PE investors wanting to dabble in India’s volatile real estate market settling down for commercial assets, housing multinational clients, given its low risk and stable yields.

The highest rental yields among emerging markets and the possibility of Indian REITs (real estate investment trusts) taking off has made it interesting for Global PEs to make India foray.  

 To sum up, India’s office space market is still heavily fragmented given some developments could have between 70 to 100 landlords.