PEs wary of commercial realty space

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 turn around 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. “There is glut in commercial, while residential is self-liquidating with minimal exit risk,” added Jogani.

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.

Ashish Joshi, chief investment officer at Milestone Capital, a $600 million investment fund for realty, said commercial property is facing 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,” he said.

Kunal Kakad, national director, Colliers International India, said: “The mismatch between demand-supply dynamics will compel developers to be more innovative/ creative in offering lease incentives to prospective and 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.