Bengaluru real estate, a hotspot for PE funds

PE funds have invested Rs 13,000 cr into the property market in Bengaluru over 5 years.

Mumbai and the National Capital Region (NCR) have the biggest real estate companies.

And, despite Mumbai having the country’s costliest real estate and the NCR being the biggest property market, it is Bengaluru which has over the past five years got the highest share of private equity (PE) investment in the sector.

PE funds have invested a little over $2 billion (nearly Rs 13,000 crore) in the property market of the Karnataka capital in five years. Over the same period, Mumbai saw PE investments of $1.87 bn (about Rs 12,000 crore), according to VCCEdge, research arm of VCCircle.

The recent tie-up between global investment bank Goldman Sachs and Nitesh Estates to jointly invest in commercial real estate assets for up to $250 million (Rs 1,600 crore) is the latest instance of PE association with a Bengaluru developer.

Prominent among other such deals are the Embassy group’s joint venture with Blackstone, Temasek Holding’s acquisition of Assetz Global Technology Park for Rs 800 crore and RMZ’s partnership with Qatar Investment Authroity.

“Most developers have a good portfolio, owned and operated by them. They have long leases, grade-A clients and Fortune 500 companies, which is why professional money is chasing them,” said Thirumal Govindraj, managing director-management at RMZ Corp.

Not are PE investors lagging on home properties in Bengaluru. “We are comfortable underwriting transactions in Bengaluru, as pricing tends to be range-bound and stable,” said Khushru Jijina, managing director at Piramal Fund Management.

Piramal invested Rs 1,000 crore (Rs 10 billion) over the past year and intends to disburse another Rs 1,000 crore over the next two quarters.

Mumbai's average prices have breached Rs 8,000 a sq ft; Bengaluru's average home prices are Rs 4,000 a sq ft. Those in Mumbai rose 10 per cent in 2014; Bengaluru's saw seven per cent, says realty consultancy Knight Frank.

The Mumbai-based ASK Group has deployed Rs 250 crore (Rs 2.5 billion) in the past two years in Bengaluru and wants to do more.

“Bengaluru is a user market and because of continuous supply by good developers, prices have been under check,” said Amit Bhagat, managing director at ASK Property Investment Advisors.

Reasonable prices led to good sales. While Mumbai sold 68,000 residential units in 2014, Bengaluru was second highest at 55,000 units.

However, Mumbai has the highest number of unsold units in the country, about 200,000 as of December 2014. Bengaluru needs seven quarters to sell its inventory, Mumbai will take 11.5 and the NCR will take 13.8.

“Large information technology job creation, coupled with a preferred choice of base for booming e-commerce companies, have been the key reasons why Bengaluru has witnessed the highest absorption in the country. Also within the IT space, the presence of a middle to high income workforce as compared to the entry stage in some of the other markets has added fuel to the absorption,” said Sharad Mittal, head, real estate, Motilal Oswal Private Equity Advisors.

“The Bengaluru market is unaffected by the slowdown in real estate. It is seeing steady traction, volumes and reasonably good margins. PE funds like projects where margins are sustainable and transparent,” says Om Ahuja, chief executive, residential, at the Brigade group.

He adds that as most developers do joint development deals, they have more clarity and transparency, a quality liked by PE funds.

According to a PropEquity report, Bengaluru was Number 6 in all-India property rankings in 2009 but became Number 1 in 2015.

In 2014, Bengaluru saw 50 per cent more of completed projects, compared to 2013.

And, with almost 500 new projects in 2014, Bengaluru accounted for 20 per cent of the total number launched in the country’s top 14 cities.