Raheja to develop 6 million sqft for Rs. 2000 crore in Navi Mumbai

Buoyant with the increasing demand of affordable commercial office spaces, the K. Raheja Group which already runs three IT parks under the brand Mindspace, is planning to invest an estimated Rs.2,000 crore in acquiring land and developing 6 million sq. ft of commercial space in the next two-and-a-half years in Navi Mumbai.

Vinod Rohira, managing director and chief executive officer (commercial real estate and REIT), K Raheja Corp, said the company is looking to expand its commercial business within the Navi Mumbai region. This includes a fourth IT park, which it is looking to start building in the next six-to-nine months.

The fourth IT park which has 6 million sq ft of developable area, is being built on a 30-acre land parcel at Ghansoli, which the Raheja Group purchased from US-based specialty chemicals company Cabot Corporation for Rs.210 crore last year.

“All four business parks are ongoing projects that offer the potential to develop over 20 million sq. ft of commercial real estate in the next six to seven years, of which six million sq. ft will be ready within the next three years,” Rohira said.

“With commercial developments in Navi Mumbai, we want to bring in volumes by making the market supply-driven. Our aim is to create quality offerings at economical rates,” Rohira added. At present, Raheja Group leases its commercial office space for Rs.50 per sq. ft. which is one of the lowest in Mumbai where rentals range between Rs.250 and Rs.350 per sq. ft in upcoming financial hubs like the Bandra Kurla Complex (BKC).

Hiranandani leases 19lakh sqft to TCS at Thane

Signaling the revival of the sluggish commercial real estate sales in the city, the largest deal in the office space has just concluded between TCS and Hiranandani. Software giant Tata Consultancy Services has signed on the dotted line to pick up 19 lakh square feet for its biggest office under one roof at Hiranandani Estate in Thane.

The parties have signed a 15-year contract with the option of a reset clause every three years. The monthly lease rental for the space is between Rs 50 and Rs 55 per sq ft. the annual lease rental for the entire 19 lakh sqft will be in the range of Rs 120 to Rs 130 crore. Hiranandani Constructions expects to deliver the office in the next 18 months which will have the capacity of accommodating over 30,000 TCS employees under one roof.

“We have given 19 lakh sq feet to Tata Consultancy Services on a long lease where they will set up a single beam IT Park. This will be the largest one in the country owned by a single company. The collaboration promises to generate employment for nearly 25,000 people,” said Niranjan Hiranandani while confirming the high profile transaction.

TCS has 19 offices in Mumbai and adjoining areas which include its headquarters, and 10 delivery centres and Thane.

Commercial Property

According to real estate experts, it’s good times to make an investment in the commercial property as companies are expanding their business with an aim to improve their business sentiment. If you are looking for regular cash flow with higher return and rental, so investment in commercial property is better than residential property.

As per experts, now commercial real estate space is witnessing a revival with little high demand at the time when real estate developers are not building commercial space from last four to five years due to global financial crisis and now its expected that soon existing stock will get consumed. And in simple words we can say that it’s the main reason why real estate developers and commercial property owners are receiving higher rental yields and now people are looking it as good investment option. Indian economy is growing with growth rate of 7.3 percent, apart from that inflation has been reined in with the gradual growth in manufacturing sector. However; with all these kinds of growth commercial office spaces are also gaining momentum because companies are looking for expansion due to improved business sentiments. These days big e-commerce such as; Snapdeal, Amazon and Flipkart are looking for commercial spaces to set up their warehouses, followed by IT-enabled services and the information technology sector as well as financial services and insurance (BFSI) segments and banking sector and they all are resulting in high absorption levels in commercial properties and quality office spaces.

It is expected that in near future the industries such as; engineering, pharmaceuticals and manufacturing will provide further impetus to the real estate market. According to Amit Bhatia of Assets and Business Banking in Deutsche Bank India, “Its best time in India to invest in the commercial properties as it is giving low capital values with high rental yields. However; there are many micro markets where price of commercial properties are still low than the residential property and commercial properties are offering double the rental yields”. The more he added that Grade-A properties including offices, retails or other spaces at high street are also are bound to deliver capital appreciation and higher rentals. However; for commercial properties the capital appreciation is low due to many speculative buying in residential property. On the other hand office spaces are more driven by end users whereas; commercial space might not be as easy to sell as residential spaces are and its also easy to find tenants for offices spaces in comparison of residential.

Why it’s best time to invest in commercial property:

From investment point of view the difference between commercial and residential property is that in commercial real estate you will get more rental in comparison of residential property, but when it comes to sale property, so its pretty easy to sale residential property, but its tuff to sale commercial property, as per the statement of Viral Desai, National Director at Knight Frank India. The more he added that in past few years, residential real estate market has seen more appreciation, but now its on peak and about to get over. However; it is expected that in near future office spaces are continues to give better rental yields. In residential property the annual rental yields are about 2 percent, but when it comes to office space annual rental yields are about 8 to 11 percent. Offices spaces are offering good opportunity for investors as tenants are looking for good quality lock-in of leases spaces.

Income from commercial property:

It is suggested to invest in the property which is on the lease already because it will provide you regular cash flow, as per the statement of Desai. In normal cases, people prefer to go for the rental agreements of two to five years, if the space is for office and during that duration the tenants are locked in for that period. So if you are about to invest Rs 5 to 6 crore in an office space, so you can expect to get Rs 50 to 60 lakh as annual rental income. Apart from that you should also check that which kind of company has leased out the property and for what kind of business, for example if banks or some other brands has leased out that property, so you can expect that they will continue for next 15 to 20 years at least because they will avoid to change their address. If you are planning to buy property no multiple owners and large part of property is with real estate developers, so property maintenance will not be big challenge. As per the statement of Sanjay Dutt, Managing Director of Cushman & Wakefield, “The top three cities which have saw good supply and demand in the period of January to September 2015 were Pune, Delhi-NCR and Bengaluru. However; till now they have collectively contributed 77 percent to incremental supply and 65 percent to commercial absorption and on the same time you can expect annual rental yields of 11 to 12 percent for Bengaluru, whereas; in Delhi and Pune you can expect annual rental yields of 7 to 9 percent.

Why should you leverage the opportunity?

We all know that unit size of commercial real estate is larger than the residential and due to that investors need to invest much larger amount in commercial property. And apart from that they will get no tax incentive for investing in commercial real estate, as they are used to get for homes. If you are thinking that price of property is too high and you will be not able to manage it, so you can take loan for the property against rental income.

Checklist before buying commercial property:

1. It’s recommended to check the background and experience of real estate developer in commercial property.
2. If there are any existing tenants, so better to consult with them and its suggested to check that what kind of companies have leased out the space and the business the tenants are into

• Check the infrastructure, society, location as well as surrounding area.

1. If you are taking loan or borrowing money, so never keep your property vacant for long periods.
2. If buying resale property, so prefer to buy leased out property.

Real Estate Sector

At the end of 2015, the investment into real estate sector is ready to close with $ 8 billion or Rs 53,000 crore and it highest among last seven years. However; most of the money has come from borrowings as well as private equity (PE) route through NCD (non-convertible debentures).

While looking to size of the inflows you might get surprised as it is not in good shape nor systematic. From past few years, the residential space has been under pressure whereas; the pieces of commercial properties have also done the same reasonably. But its less than 5^th of the PE funds and it has find its way to the commercial real estate, on the other side the bulk is flowing into residential ventures. According to experts if real estate developers have not dropped prices than all credit goes to investors backing. As per the estimation of Cushman and Wakefield, about $ 2.8 billion or Rs 18,700 crore had been find a way in real estate market through private equity players till the end of Q3, 2015. While adding to that estimates $ 4.5 billion, or Rs 30,500 crore, of NCDs the tally is already up by the 74 percent with Rs 17,600 crore.

The investments are not materialized, whereas; real estate developers can drop their prices to monetize inventory at the point of time when demand is decreasing. However; there are large group of real estate builders which are holding on the inventory and refusing to pay back to their lenders. According to reports of CRISIL the debt obligations on real estate market is Rs 30,000 crore. On the other side the cost of alternative funding has jumped in past one year as real estate developers strapped for cash and for NCDs the internal rate of return are 20 percent whereas; in 2012 there were no were virtually comparable issuances. If you are expecting higher return on PEs, so it will also increase the refinancing risk for the realtors for long terms, as per reports of CRISIL. It is hard to see that how real estate builders going to refinance the about what they have borrowed through NCDs as banks were not financing to this sectors.

However; still builders are not into much trouble, as Vikas Oberoi, MD and Chairman of Oberoi Realty, points out that its seems that there are no shortage of money because real estate developers are backed by different ventures. Whereas; the financial schemes which was offered by the real estate developers can be considered to be in the nature of a discount as real estate builders have managed to sell the apartments and for that they have reduced the size of apartments. There are many investors who are big game player and now they are betting on the real estate market. From GIC (Government of Singapore Investment Corporation) to Blackstone and Warburg Pincus to Goldman Sachs, they are picking up stakes in different residential and commercial projects at the level of the enterprise. CRISIL, one of the major rating agency estimates that for a clutch of 25 companies; in next five to six years the payout to PE funds could be Rs 85,000 crore and it is nominal return with 20 percent. According to Samantak Das, Director of research at Knight Frank India the prices may hold for next two years, but in the absence of demand they’re unsustainable.

Apart from that when it comes to domestic funds, so alone they have been a share of more than $ 2 billion into the residential sector in 2015 and it is expected that it is 80 percent of the of structured debt. For real estate developer, structured product means; it ensures they can exit at a pre-determined return. According to Abrol; the risk for investors today is far lower than they were facing in 2008 and due to that most of the time PE players ensure they have the first charge on cash flows.

RMZ Corporation Banglore

Essar is in initial negotiation stage with real estate developer RMZ Corp to sell its Equinox Business Park, which is located in Mumbai. According to sources the price of deal will be about Rs 2,400 crore, or $ 360 million. In recent years, this could be the biggest commercial real estate deal in the MMR region as billionaire brothers Ravi Ruia and Shashi Ruia are divesting their noncore assets to repay the debt of Essar.

Equinox Business Park, which owned by Ruia family is located adjacent to Bandra Kurla Complex and it is the house of leading market players such as; Nissan, Tata Communications, IDFC, Crompton Greaves and Lafarge and of course Essar companies as well. However; Bangalore based real estate developer RMZ Corp is backed by the QIA (Qatar Investment Authorit) and it is expected that it will pay about Rs 19,000 per sqft for Equinox Business Park, which is spread on an area of 1.2 million sqft. It is expected that RMZ will conclude the deal in tow equal stages over the period of six months. It will be 100 percent acquisition from both parties as both parties will meet certain milestones in their business. According to Manoj Menda, Vice Chairman of RMZ, “We confirmed the rumors of deal, but at this point of stage we cannot comment”, however; on the other side Essar declined any comment. According to statement of Anshuman Magazine, Chairman and Managing Director of CBRE for South Asia division, “This deal shows that how commercial real estate is generating interest among real estate developer, especially when it comes to core rental yielding assets. The risk associated with these kinds of properties is much lower than the fully constructed properties where there is no pressure of development and rentals”.

Currently, RMZ is managing about more than 20 million sqft of office space in different cities and now this real estate developer is looking for some large deals to acquire more space in commercial segment as RMZ aims to build a 80 million sqft portfolio in the next three to five years. RMZ’s this acquisition is one of the largest and latest among the series of high profile office space deals because some global investors such as; Brookfield Asset Management, GIC of Singapore, Canadian Pension Plan Investment Board¸ Middle East and Blackstone are over sign a funds to down transaction opportunities in the India. In last calendar year these global investors have acquired assets worth $ 3 billion. In present all the major global real estate developers seeing Indian real estate market as a golden opportunity as in India “Grade A Office” buildings are riding on a robust services economy. Anuj Puri, Chairman and Country Head of JLL India stated that in spite of different influences which shape up real estate markets in India, inherent equity of Mumbai as India’s financial capital remains undiminished and it is expected that it will continue to drive major decisions by large corporates and investment houses.

In December 2014, GIC of Singapore was acquired 69 percent stake in Nirlon and currently it is managing 2 million sqft office space in Goregaon suburb and its cost is Rs. 1300 crore. Apart from that we all know that last month pharma MNC Abbott was acquired .35 lakh sqft in one of the commercial tower at BKC which was developed by the Godrej Properties and cost of deal was about Rs 1,479 crore. It was considered as the biggest transaction for any single user commercial real estate in India.

However; Brookfield’s Unitech Corporate Parks acquisition was seen as the biggest acquisition in Indian office space market. However; it paid Rs 2050 crore for majority control of six parks in Kolkata and NCR. Apart from that with undisclosed amount they also buy 40 percent holding in Unitech.