PEs cagey of investing in commercial space
Have shifted focus on residential segment which is showing signs of recovery
Homes, sweet homes
There is a glut in commercial spaces whereas the residential segment is self liquidating with minimal exit risk
Two years of unsold stock piled awaiting tenants
Funds targeting only mix development projects rather than standalone commercial spaces
Sobia Khan.
Bangalore
Once bitten twice shy, private equity (PE) players have become wiser and are a taking cautious approach to investing in the commercial realty segment.
This is in direct contrast to the situation a year back, when realty majors could cherry-pick PE funds and command sky-high valuations.
While some of the realty firms -- encouraged by early signs of a revival in the market -- are reviving shelved or deferred projects, PE funds have shifted focus to the residential segment, which is showing earlier sign of recovery.
According to PE funds, the commercial property market is expected to completely turnaround only by 2011.
Ramesh T Jogani, MD and CEO of PE firm Indiareit Fund Advisors, said, "Residential segment is no longer a dead asset and risk area. The stability and confidence is back in the residential market while the commercial property market will take time to bounce back."
The fund is playing safe by targeting only mix-development projects and not investing in standalone commercial properties.
Indiareit, promoted by Piramal Enterprise, has recently launched a Rs 500 crore, close-ended fund focussed on residential projects in major metros. "There is glut in commercial, while residential is self-liquidating with minimal exit risk," added Jogani.
Indiareit will use residential cash flows for commercial development in cities. Going ahead, the firm plans to have 70% of its portfolio allocated to residential.
Arun Natarajan, founder and CEO of PE data tracking company Venture Intelligence, said there were 20 deals worth $867 million till October 2009 in the real estate segment. Over 70% of this money was into residential.
According to global real estate consultant firm CB Richard Ellis, India will add up to 40 million sq ft of office space this year, more than many advanced countries.
Of the total anticipated supply this year, Mumbai, Bangalore and the National Capital Region will house most of the spaces. "PEs are cautious of investing in commercial property as there is two years of unsold stock awaiting tenants," said an analyst on the basis of anonymity.
Agreeing with the same, Ashish Joshi, chief investment officer at Milestone Capital, a $600 million investment fund for realty, said commercial property is yet to come out of wood as there is supply overhang. "We are not looking to invest in commercial property immediately. We will invest in property which has already being leased out with no risk involved," said Joshi.
Milestone is being choosy about any investments in greenfield projects. It plans to focus on warehousing and the mass-housing segment and has so far invested in 3 properties in Chennai, Hyderabad and Nagpur.
While PEs are being apprehensive of committing money in commercial property, developers like DLF and Unitech are looking to resurrect stalled projects.
Besides this, large developers such as Housing Development and Infrastructure Ltd (HDIL), Orbit Corp, Ozonegroup and Prestige Estates Projects are also in the process of launching or firming up plans to build offices and shopping malls.
Kunal Kakad, national director, Colliers International India, said: "The mismatch between demand-supply dynamics will compel the developers to be more innovative/ creative in offering lease incentives to prospective as well as existing tenants."
In a recent report, real estate consultancy firm Cushman & Wakefield estimated that absorption of office space in the first three quarters of 2009 was 4 million sq ft and is expected to be 5 million sq ft for the entire year -- a 50% drop from the 10.36 million sq ft sold in 2008.

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