TOP DEALS OF 2015

01 Jan 2016 Editorial Team

Current scenario
Even in a slow realty market, corporate land deals are picking up pace with a dozen such deals in cities such as Mumbai, Pune, Chennai, Hyderabad and Ahmedabad. Mumbai witnessed India´s largest commercial real-estate deal in terms of a single end-user transaction.

Total deals in the residential sector increased to 54 in the first three quarters of 2015, up from 42 during the corresponding period the previous year. Also, the average deal size increased by nearly 1.4 times over the preceding year to Rs 2.6 billion, states a Cushman & Wakefield report.

In September, for instance, Carnival Group bought commercial real-estate projects from Larsen & Toubro in Chandigarh for Rs 1,785 crore. Another noteworthy deal is the sea-facing triplex penthouse in South Mumbai´s Nepean Sea Road, bought for Rs 202 crore. (See table on ´Top Purchasing Deals 2015´ on page 110) Apart from companies in the non-real estate space, many are also looking to monetise land parcels in markets such as NCR, creating multiple opportunities for developers with resources to buy land at reasonable valuation.

According to Anshuman Magazine, Chairman & Managing Director, CBRE South Asia Pvt Ltd, ´The deals in 2015 are higher compared to 2014 by about 5 per cent.´ Pankaj Kapoor, Founder & Managing Director, Liases Foras, adds, ´This year has seen more deals; and as private equity (PE) has picked up, we will see an increase in the number of deals.´ Further, Ramesh Nair, COO-Business & International Director, JLL India, observes, ´There has been at least a 50 per cent growth in PE deals this year. Asian capital is coming into the country, so a lot of sovereign and pension funds are looking at India more closely. Also, pure equity investments are coming back into the market. Previously, it used to be only structured debt deal.´

Major drivers
The year 2015 marked a turnaround for India´s commercial real estate. ´A big factor is the IT and ITES companies taking commercial space,´ says Magazine. India´s office space absorption in 2015 stood at 35 million sq ft - the second highest in our history after 2011. In 2015, a key reason for the spurt in land deals was the steady demand for commercial office. Besides, as Kapoor says, ´Land prices are undergoing moderation.´

However, land acquisition is a big issue. ´The government has to facilitate easier acquisition; this is a key to development,´ observes Magazine. ´Landowners should be given fair compensation.´ And Nair affirms, ´The government should provide single-window clearances, create infrastructure and look at city planning holistically, by creating more planned cities.´

While land acquisition issues remain, several big-ticket lease agreements were signed in 2015 with steady growth in the commercial sector. For instance, Flipkart leased 2 million sq ft of an office campus in Bengaluru. The office market saw the strongest growth in Bengaluru - a tremendous 500 per cent increase in absorption rate. Further, Abbott India bought over 4 lakh sq ft of office space in Mumbai´s BKC from Godrej Properties, making it the single-largest end-user commercial property deal so far. (See table on ´Top Rental Deals in 2015´ on page 109) Even when the economy was moving at a snail´s pace, office transactions were happening, points out Gulam Zia, Executive Director-Advisory, Retail & Hospitality, Knight Frank India. ´Even if office space absorption is not doubling, it is going steady and there are few exceptional deals. In the current year, too, we expect about 8-10 per cent CAGR for office space absorption.´ Although the residential segment did perform poorly, there have been exceptional deals happening nonetheless in terms of value, size, unique locations, etc. ´People buying today are getting a value deal, which is what is driving these deals to closure,´ he adds.

For Nair, there are other positives that allowed more deal activity. ´One key reason is the difference between what the seller and the buyer are saying - that spread narrowed because developers were going through liquidity challenges, because of which they were willing to cut more deals.´ Second, with the new government coming in, overall investor sentiment globally has become more positive. ´The prime minister´s overseas trips have also helped and there is a lot more foreign capital chasing real-estate deals today,´ he adds. ´Overall corporate and institutional investor sentiment has also gone up. Third, FDI rules have been twice relaxed.´

On the buying hit list
Magazine observes that an improvement has been seen in the mid-market segment. ´The main activity is in the residential side; it is confined to major cities like Delhi, Mumbai and Bengaluru,´ he says. Nair points to these cities as a gateway for foreign PE capital. Kapoor, too, sees potential in major metros. He says, ´Southern and western India - Pune, Mumbai, Bengaluru, Hyderabad - are where I see movement happening.´ Zia votes for Bengaluru as a steady market. ´Even in the worst times, it has performed and continues to grow year-on-year,´ he observes. ´Mumbai has been fluctuating, which indicates a diminishing market and shows reduction in the number of transactions. Pune remains stable and NCR seems to be falling.´

Amid dark clouds
Total unsold inventory in India stands at 706,900 units, states an August report; this will take over three years to sell. With such a high rate of unsold inventory, what are the factors driving these huge deals? According to Magazine, ´While the overall market is slow, the mid-market and affordable segments are doing well.´ For Zia, ´Unsold inventory has to be seen from the perspective of absorptions. Completion time has shot up to four to five years owing to high rises. And, if the completion time is more than absorption time, it is not something to worry about.´

For Kapoor, too, unsold stock is not a major concern. ´We are a country with a housing shortage; the demand is high, the only dearth is the current price leading to unsold inventory.´ He goes on to explain, ´If last year is compared to this year, by virtue of income rises and interest rate reduction, the affordability index would have improved from 25 per cent to 30 per cent and has shown a year-on-year improvement in sales. Over two years, we will see a surge in sales, but prices may maintain stagnancy. So, the concern is not inventory, but the increase in sales.´ Nair confirms that deals are happening in the commercial space despite a pile of unsold inventory. ´Commercial uptake has gone up to 28 per cent this year. Also, if we delve into the unsold inventory number, in Mumbai for instance, the unsold inventory of completed units is 3 per cent of total unsold inventory, which is positive.´

Attracting investments
Land values in India remain rock-steady as developers backed by global and domestic PE capital chase land parcels in a weak market. PE investments in the real-estate sector from January-September 2015 recorded the highest investment level since 2008 at Rs 183 billion, 84 per cent higher over the corresponding period of the previous year. Despite domestic funds contributing a larger number of deals (45 out of 61) in the first nine months of 2015, foreign funds had a larger average deal size of Rs 6.7 billion compared to domestic funds´ average deal size of Rs 1.6 billion, signifying a larger appetite of foreign funds for investments.

The residential sector attracted a majority (77 per cent) of total PE investment volume between January and September 2015. The commercial office sector accounted for over 19 per cent share in total investment volume during the first three quarters of 2015 and saw the average deal size increase by 27 per cent over the previous year to Rs 7 billion.

Some noteworthy PE deals include Ozone Urbana Infra Developers raising Rs 575 crore from Piramal Fund Management and Assetz Property and Homes LLP raising Rs 748 crore from Equis Fund Group, among others. (See table on ´Top Private Equity Deals in 2015´ on page 110)

Foreign investments
With global funds committing more capital to Indian real estate, many land purchases are likely to take place via partnerships between developers and fund houses. In June, for instance, Bengaluru-based Brigade Properties, a JV between Brigade Enterprises and Singapore´s sovereign wealth fund GIC, bought a 15.8-acre plot in Chennai´s Perungudi area for Rs 550 crore from Kansai Nerolac Paints. (See table on ´Top Private Equity Deals in 2015´ on page 110)

India seems to be more poised than other global geographies, and this is driving foreign investors. Kapoor agrees, saying, ´Demand for housing has to be met in Asian countries; the UK and US have met this already.´

Also, income-yielding office projects attracted a majority of equity investments. The focus was restricted to Tier-I cities, with NCR, Mumbai and Bengaluru attracting a majority of investments (73 per cent). Mumbai attracted the highest PE investment volume, with over 40 per cent share in total PE investment volume in the first three quarters of 2015.

Foreign funds led investment activity in the commercial office space with over 92 per cent share, the remaining being contributed through a JV partnership between a foreign and a domestic fund. This indicates increased appetite of foreign funds to invest in the real-estate sector and acquire commercial assets at attractive valuations.

However, international deals need to be given a further push.
The government has made it easy for FDI in the country, encouraging the market to pick up. ´As demand picks up, returns will come in, and this will encourage foreign investment,´ believes Magazine. He adds that the expected GDP growth will encourage both domestic and foreign investment.

As for FDI, Zia avers that it is directly linked to the performance of this market. ´The right decisions taken, the right policy framework, etc, will help when the markets start improving, and then FDI flow will be much better,´ he adds.

Future watch
So, what will propel deals in coming months?
It will directly depend on the recovery of the sector. As Magazine suggests, ´Economic GDP growth, interest rates and prices coming down, and improvement in infrastructure in terms of connectivity, roads and power, will drive growth.´ Realty should be seen as an end-user market. In Kapoor´s view, for India, land is still unproductive and there should be 30 per cent correction in moderation; second, vacant land tax should be adopted to ensure land remains productive; cheaper capital should be created for cheaper housing by the government.

All considered, the Indian real-estate industry is maturing and this will lead to foreign investment and adoption of international best practices by players. With demand expected to remain consistent over most of 2016, we are likely to see many more big-ticket deals in the year to come.

Quick Bytes

Residential deals increased to 54 from
42 in the first three quarters of 2015.
Several lease agreements signed in 2015 with steady growth in commercial space.
About 50 per cent growth in PE deals in 2015.
With global funds, land purchases likely via partnerships between developers and fund houses.

CW PROPERTY TODAY showcases top real-estate deals that made headlines in 2015 despite a slow-moving economy. The Indian real-estate sector has had an interesting year. According to a recent Cushman & Wakefield report, the total number of deals in the first nine months (January to September 2015) was 61 compared to 52 in the corresponding period last year. Further, the average deal size also increased during the first three quarters of 2015 - Rs 3 billion as against an average deal size of Rs 1.9 billion during the same time last year. Current scenario Even in a slow realty market, corporate land deals are picking up pace with a dozen such deals in cities such as Mumbai, Pune, Chennai, Hyderabad and Ahmedabad. Mumbai witnessed India´s largest commercial real-estate deal in terms of a single end-user transaction. Total deals in the residential sector increased to 54 in the first three quarters of 2015, up from 42 during the corresponding period the previous year. Also, the average deal size increased by nearly 1.4 times over the preceding year to Rs 2.6 billion, states a Cushman & Wakefield report. In September, for instance, Carnival Group bought commercial real-estate projects from Larsen & Toubro in Chandigarh for Rs 1,785 crore. Another noteworthy deal is the sea-facing triplex penthouse in South Mumbai´s Nepean Sea Road, bought for Rs 202 crore. (See table on ´Top Purchasing Deals 2015´ on page 110) Apart from companies in the non-real estate space, many are also looking to monetise land parcels in markets such as NCR, creating multiple opportunities for developers with resources to buy land at reasonable valuation. According to Anshuman Magazine, Chairman & Managing Director, CBRE South Asia Pvt Ltd, ´The deals in 2015 are higher compared to 2014 by about 5 per cent.´ Pankaj Kapoor, Founder & Managing Director, Liases Foras, adds, ´This year has seen more deals; and as private equity (PE) has picked up, we will see an increase in the number of deals.´ Further, Ramesh Nair, COO-Business & International Director, JLL India, observes, ´There has been at least a 50 per cent growth in PE deals this year. Asian capital is coming into the country, so a lot of sovereign and pension funds are looking at India more closely. Also, pure equity investments are coming back into the market. Previously, it used to be only structured debt deal.´ Major drivers The year 2015 marked a turnaround for India´s commercial real estate. ´A big factor is the IT and ITES companies taking commercial space,´ says Magazine. India´s office space absorption in 2015 stood at 35 million sq ft - the second highest in our history after 2011. In 2015, a key reason for the spurt in land deals was the steady demand for commercial office. Besides, as Kapoor says, ´Land prices are undergoing moderation.´ However, land acquisition is a big issue. ´The government has to facilitate easier acquisition; this is a key to development,´ observes Magazine. ´Landowners should be given fair compensation.´ And Nair affirms, ´The government should provide single-window clearances, create infrastructure and look at city planning holistically, by creating more planned cities.´ While land acquisition issues remain, several big-ticket lease agreements were signed in 2015 with steady growth in the commercial sector. For instance, Flipkart leased 2 million sq ft of an office campus in Bengaluru. The office market saw the strongest growth in Bengaluru - a tremendous 500 per cent increase in absorption rate. Further, Abbott India bought over 4 lakh sq ft of office space in Mumbai´s BKC from Godrej Properties, making it the single-largest end-user commercial property deal so far. (See table on ´Top Rental Deals in 2015´ on page 109) Even when the economy was moving at a snail´s pace, office transactions were happening, points out Gulam Zia, Executive Director-Advisory, Retail & Hospitality, Knight Frank India. ´Even if office space absorption is not doubling, it is going steady and there are few exceptional deals. In the current year, too, we expect about 8-10 per cent CAGR for office space absorption.´ Although the residential segment did perform poorly, there have been exceptional deals happening nonetheless in terms of value, size, unique locations, etc. ´People buying today are getting a value deal, which is what is driving these deals to closure,´ he adds. For Nair, there are other positives that allowed more deal activity. ´One key reason is the difference between what the seller and the buyer are saying - that spread narrowed because developers were going through liquidity challenges, because of which they were willing to cut more deals.´ Second, with the new government coming in, overall investor sentiment globally has become more positive. ´The prime minister´s overseas trips have also helped and there is a lot more foreign capital chasing real-estate deals today,´ he adds. ´Overall corporate and institutional investor sentiment has also gone up. Third, FDI rules have been twice relaxed.´ On the buying hit list Magazine observes that an improvement has been seen in the mid-market segment. ´The main activity is in the residential side; it is confined to major cities like Delhi, Mumbai and Bengaluru,´ he says. Nair points to these cities as a gateway for foreign PE capital. Kapoor, too, sees potential in major metros. He says, ´Southern and western India - Pune, Mumbai, Bengaluru, Hyderabad - are where I see movement happening.´ Zia votes for Bengaluru as a steady market. ´Even in the worst times, it has performed and continues to grow year-on-year,´ he observes. ´Mumbai has been fluctuating, which indicates a diminishing market and shows reduction in the number of transactions. Pune remains stable and NCR seems to be falling.´ Amid dark clouds Total unsold inventory in India stands at 706,900 units, states an August report; this will take over three years to sell. With such a high rate of unsold inventory, what are the factors driving these huge deals? According to Magazine, ´While the overall market is slow, the mid-market and affordable segments are doing well.´ For Zia, ´Unsold inventory has to be seen from the perspective of absorptions. Completion time has shot up to four to five years owing to high rises. And, if the completion time is more than absorption time, it is not something to worry about.´ For Kapoor, too, unsold stock is not a major concern. ´We are a country with a housing shortage; the demand is high, the only dearth is the current price leading to unsold inventory.´ He goes on to explain, ´If last year is compared to this year, by virtue of income rises and interest rate reduction, the affordability index would have improved from 25 per cent to 30 per cent and has shown a year-on-year improvement in sales. Over two years, we will see a surge in sales, but prices may maintain stagnancy. So, the concern is not inventory, but the increase in sales.´ Nair confirms that deals are happening in the commercial space despite a pile of unsold inventory. ´Commercial uptake has gone up to 28 per cent this year. Also, if we delve into the unsold inventory number, in Mumbai for instance, the unsold inventory of completed units is 3 per cent of total unsold inventory, which is positive.´ Attracting investments Land values in India remain rock-steady as developers backed by global and domestic PE capital chase land parcels in a weak market. PE investments in the real-estate sector from January-September 2015 recorded the highest investment level since 2008 at Rs 183 billion, 84 per cent higher over the corresponding period of the previous year. Despite domestic funds contributing a larger number of deals (45 out of 61) in the first nine months of 2015, foreign funds had a larger average deal size of Rs 6.7 billion compared to domestic funds´ average deal size of Rs 1.6 billion, signifying a larger appetite of foreign funds for investments. The residential sector attracted a majority (77 per cent) of total PE investment volume between January and September 2015. The commercial office sector accounted for over 19 per cent share in total investment volume during the first three quarters of 2015 and saw the average deal size increase by 27 per cent over the previous year to Rs 7 billion. Some noteworthy PE deals include Ozone Urbana Infra Developers raising Rs 575 crore from Piramal Fund Management and Assetz Property and Homes LLP raising Rs 748 crore from Equis Fund Group, among others. (See table on ´Top Private Equity Deals in 2015´ on page 110) Foreign investments With global funds committing more capital to Indian real estate, many land purchases are likely to take place via partnerships between developers and fund houses. In June, for instance, Bengaluru-based Brigade Properties, a JV between Brigade Enterprises and Singapore´s sovereign wealth fund GIC, bought a 15.8-acre plot in Chennai´s Perungudi area for Rs 550 crore from Kansai Nerolac Paints. (See table on ´Top Private Equity Deals in 2015´ on page 110) India seems to be more poised than other global geographies, and this is driving foreign investors. Kapoor agrees, saying, ´Demand for housing has to be met in Asian countries; the UK and US have met this already.´ Also, income-yielding office projects attracted a majority of equity investments. The focus was restricted to Tier-I cities, with NCR, Mumbai and Bengaluru attracting a majority of investments (73 per cent). Mumbai attracted the highest PE investment volume, with over 40 per cent share in total PE investment volume in the first three quarters of 2015. Foreign funds led investment activity in the commercial office space with over 92 per cent share, the remaining being contributed through a JV partnership between a foreign and a domestic fund. This indicates increased appetite of foreign funds to invest in the real-estate sector and acquire commercial assets at attractive valuations. However, international deals need to be given a further push. The government has made it easy for FDI in the country, encouraging the market to pick up. ´As demand picks up, returns will come in, and this will encourage foreign investment,´ believes Magazine. He adds that the expected GDP growth will encourage both domestic and foreign investment. As for FDI, Zia avers that it is directly linked to the performance of this market. ´The right decisions taken, the right policy framework, etc, will help when the markets start improving, and then FDI flow will be much better,´ he adds. Future watch So, what will propel deals in coming months? It will directly depend on the recovery of the sector. As Magazine suggests, ´Economic GDP growth, interest rates and prices coming down, and improvement in infrastructure in terms of connectivity, roads and power, will drive growth.´ Realty should be seen as an end-user market. In Kapoor´s view, for India, land is still unproductive and there should be 30 per cent correction in moderation; second, vacant land tax should be adopted to ensure land remains productive; cheaper capital should be created for cheaper housing by the government. All considered, the Indian real-estate industry is maturing and this will lead to foreign investment and adoption of international best practices by players. With demand expected to remain consistent over most of 2016, we are likely to see many more big-ticket deals in the year to come. Quick Bytes Residential deals increased to 54 from 42 in the first three quarters of 2015. Several lease agreements signed in 2015 with steady growth in commercial space. About 50 per cent growth in PE deals in 2015. With global funds, land purchases likely via partnerships between developers and fund houses.