Domestic players like Indiabulls AIF, Reliance MF, ICICI Prudential and Milestone Capital Advisors are in the process of raising an estimated `5,000 to `6,000 crore which will be invested in commercial projects, mainly office buildings, industry sources familiar with the development said.

So far, investments in commercial projects have been dominated by global private equity (PE) funds, with deep pockets to dip into Grade A quality portfolios of large real estate developers. The likes of Blackstone, Canadian Pension Fund Investment Board (CPPIB), GIC and Qatar Investment Authority (QIA) have pumped in billions of dollars, in the form of equity investments in DLF, K Raheja Corporation, RMZ and Embassy Developers. Together, these investments total more than Rs 17,000 crore.
Even without the largest deal, the amount is in the range of `6,000 crore between just three companies. But not all companies can fit the bill. “There are several other developers who don’t have large enough portfolios but are in need for construction finance, maybe Rs 200 crore to Rs 300 crore,” said Rajeev Bairathi, executive director at Knight Frank, India.
It is these projects that are likely to be the mainstay of the domestic funds. Amber Maheswari, CEO of Indiabulls AIF said that of the `1,500 crore fund it is raising, each investment will be approximately Rs 250 crore to Rs 300 crore, offices measuring between 100,000 sq ft to 200,000 sq ft.

At the moment, only a handful of funds such as Ascendas and JPMorgan and selectively, even Blackstone are extending loans of smaller value to developers. “Around 70% of total office absorption takes place in the assets of top notch developers, who have already attracted equity investments from international funds. But there is a headroom for smaller ticket investments in the bottom 30%, which is 10-12 million sq ft,” said Sanjay Dutt, CEO at Ascendas, India. The total annual absorption of office buildings as of last year is almost 40 million sq ft.

Recently Ascendas extended one such loan to Pune based, Paranjpe Schemes for its BrickRidge project. “Funds like Blackstone and QIA were early movers three or four years back, yield rates were then competitive. Others don’t have the same bandwidth so they will have to address different needs,” said a fund manager.

The problem is that funds are looking for pre-leased assets, which bear no construction risk, said Shashank Paranjpe, managing director at Paranjpe Schemes. Funds are willing to forego the high return because they won’t take the high risk that comes with it. In fact, the opportunity in the under construction commercial segment is much bigger than just 10 to 12 million sq ft, it runs into more than 200 to 300 million sq ft, said Maheswari but funds are cautious.
“It is not as if PE companies won’t fund early stage needs at all but such lending won’t comprise more than 20% of the investments; majority will be deployed in income-generating assets,” he added. For instance, when Brookfield invested in Unitech’s corporate park, it was partially leased out. Similarly, BrickRidge has also been “forward sold,” which means funds will buy part of the asset at a pre-determined, competitive capitalisation (yield) rate. In many cases, upwards of 10% is considered attractive.

Blackstone bought major part of its amassed portfolio at yield rates 10% to 12%, according to people in the know. Over the past three to four years, the rates have dropped to 8%, which means the asset value has increased. Recently CPPIB bought into Phoenix Mill’s income generating assets at rates lower than 6%. “Forward sold is nothing but an asset purchase but it is restricted to floors; the idea is to acquire at a nominal rate and enjoy the upsides once it gets leased out,” said Maheswari.