Local PEs face headwinds on office funds

While global fund managers such as Blackstone and Brookfield are pouring billions into the Indian office space, home-grown managers are facing challenges in raising funds to invest in office properties.

In 2017, domestic fund managers were planning to raise between ~50 billion and ~60 billion in private equity funds for investing in office properties but all of it is not being raised now.

For instance, Reliance Nippon Asset Management has put on hold its plans to launch a ~10 billion rental yield fund to buy office assets, said a source in the know. The fund was to be raised from global and domestic investors.

“Domestic investors are not so bullish on office properties now. That’s why they have put it on hold,” said a source.

A spokesperson for Reliance Nippon Asset Management did not comment on the issue.

Another Mumbai-based fund manager, Milestone Capital, also reduced the size of its commercial property fund from ~10 billion fund to ~2 billion due to volatility in the markets, said its vicechairman Ruby Arya.

Milestone has also changed its plans to launch a ~10 billion logistics fund and is looking to invest in logistics through the ~2 billion commercial fund.

“We will co-invest with the high networth investors and institutional investors. There is a lot of interest from institutional investors for investments in logistics,” Arya said.

According to sources, two more fund managers have shelved plans to launch funds for office projects but their names could not be found out.

Some fund managers, such as ASK group, are looking to invest in office projects and raise project-specific capital instead of launching separate funds for office.

“We can’t be seen as an investor in office properties but we are not averse to investing in office projects if there is a good opportunity,” said Amit Bhagat, managing director at ASK Property Investment Advisors, a property fund manager.

He said they will find capital if they identify an opportunity to invest in an office project.

According to fund managers, domestic investors in PE funds are averse to putting money in office property funds for a couple of reasons.

“Net yields in office properties have not remained attractive for domestic investors and upside is limited in such properties,” said Amit Goenka, chief executive and MD at Nisus Finance, a fund manager. Goenka said net yields in office properties have fallen from 10 per cent to 7.5 per cent to eight per cent as capital values have gone up and rents remained same.

“But falling yields have not bothered global investors such as Blackstone whose cost of funds are lower (between one to two per cent). Indian investors are borrowing at 9-9.5 per cent,” he said.

Ashish Singh, managing director (real estate investments), Standard Chartered Private Equity Advisory, said risk appetite is different for domestic and global investors.

“Mostly, deal flow in office properties is in development projects. But there is inability to generate and distribute regular coupon (interest) from the beginning of the development to completion as the project does not generate rental income during this period. Most domestic investors look for regular coupon distribution after investment,” he said.

He said ability to distribute regular income is available only in rented properties and opportunity to invest in such properties for funds comprising domestic investors are limited as ticket sizes in such deals are large and sizes of such funds are rather small for these ticket sizes.

However, some firms such as ICICI Prudential Asset Management and Indiabulls Private Equity have raised funds for office properties in the recent past. ICICI Prudential has done the first close for its ~7 billion fund and is pursuing deals actively, said Rahul Rai, head of real estate business at ICICI Prudential AMC.