RPT-Blackstone drives India private equity shift from home to office

Wed Feb 27, 2013 10:18pm EST

* Private equity funds still seek longer-term exposure to
Indian property
    * Commercial property offers steady rental income as unsold
homes mount
    * Blackstone in talks to buy Gurgaon special economic zone
for $440 mln - sources

    By Aditi Shah
    MUMBAI, Feb 28 (Reuters) - Blackstone Group LP is
driving the migration of private equity money into India's
commercial real estate after the global financial crisis cooled
the country's once-ardent residential segment and the number of
unsold new homes surged. 
    Since 2005, when India opened its property sector to foreign
investors, money has mostly poured into housing because of
simpler investment rules while sales of finished homes provide
private equity funds a clear exit. But with Indian home prices
down between 5 and 30 percent since 2009, some investors are
moving into commercial assets that yield steady rental income
and limiting their exposure to the volatile residential market.
    Despite a limited supply of commercial real estate open to
foreign investment and a lack of exit options, many investors
such as Morgan Stanley and Rothschild-backed Xander Group
Inc are eager to grab a bigger slice of India's property market
due to the country's fast-growing economy, the promise of
double-digit returns and attractive valuations. 
    "We waited till valuations got a bit softer and more
attractive. And now, we are going aggressive," Akhil Gupta,
chairman of Blackstone India, said in an interview. "We have
done a few large deals, and are looking to infuse more capital."
    Blackstone, the biggest global private equity property
investor, is the most active in India and has spent $500 million
on about 20 million square feet (1.8 million square metres) of
leased assets over the past 18 months.
    It is now on the hunt for more. 
    Most of Blackstone's India acquisitions are made jointly
with Embassy Group, a Bangalore-based developer that invests
largely in South India. 
    The duo is in talks to buy a special economic zone in
Gurgaon - the booming satellite city outside the capital New
Delhi - for about 24 billion rupees ($440 million), two sources
with direct knowledge of the matter told Reuters earlier this
month. That would be India's biggest private equity real estate
investment since 2008. 
    Owned by Unitech Corporate Parks and developed by
Delhi-based Unitech Ltd, the special economic zone has
3.7 million square feet of leased offices and potential to
develop another 1.8 million square feet, sources have said.
    The deal would follow Blackstone's recent agreement,
according to a Reuters report, to buy a technology park in
Bangalore, along with Embassy and a domestic property fund, for
around $367 million. 
    Blackstone and Embassy declined to comment. 
    As of last year, investment in Indian property by private
equity funds totalled $1.95 billion, with 57 percent of it in
commercial assets. That compares with $9.8 billion in 2007, when
most of it was in residential projects, according to
Chennai-based data firm Venture Intelligence. 
    
   
    LIMITED POOL
    The value of commercial property being built in India has
risen to around $42 billion today, still just a third of the
value of homes under construction, compared with $34 billion in
mid-2010, according to property consultant Jones Lang LaSalle.
    Not all of this can be bought by overseas funds as Indian
rules allow them to invest only in technology parks and special
economic zones. Also, foreign property investors cannot sell for
three years.
    Rising competition for the limited pool of income-producing
assets has pushed rental yields - annual rental income divided
by the cost of the asset - down to about 10 percent from 12 to
13 percent, investors say.
    Exit opportunities for funds are also few, as India does not
yet permit publicly listed real estate investment trusts
(REITs), although it is considering allowing such vehicles,
which pool income-generating assets. That means investors
looking to cash out can form private REITs, list the assets as
REITs in places such as London and Singapore, or sell to another
investor.
    Morgan Stanley, which has made several residential property
investments in India, is in talks to invest $186 million in its
first office development in the country, in Mumbai's
Bandra-Kurla financial district, Reuters reported recently. 
    For residential projects, where returns can be higher,
Morgan Stanley will stick to projects where approvals are
largely in place and land has been acquired, said Shirish
Godbole, managing director at Morgan Stanley Real Estate
Investing (MSREI) India.
    Returns on leased assets are between 14 and 16 percent,
compared with residential development projects that return 19 to
21 percent, according to Jones Lang LaSalle.