Dream of owning a mall? Take the PE route

Ever fancied playing Donald Trump by owning a stake in malls, multiplexes and IT parks? Now, for a minimum investment of ₹1 crore, you can do just this with private equity (PE) funds that specialise in commercial real estate.

How it works What such funds do is to pool money from high networth individuals and deploy it in lucrative commercial projects.

Each PE fund has an expert team that studies the growth potential and valuation of projects, and an investment manager who monitors the progress of the project.

Your money is usually locked in for four-seven years, depending on the terms and conditions of the fund, after which you can cash out with a return.

PE funds are usually development-based and buy equity stakes in individual projects. They spread the risk by owning a basket of commercial property.

These projects may comprise not only commercial office buildings but also retail space, warehouses, and IT parks located across the country. Projects are usually completed and ready to be leased out to clients.

The fund ties up with the developer and takes an equity stake in the project. It earns a regular income from rent paid by commercial tenants.

Eventually, it will sell off the property and pay investors a final return based on the appreciation in the value of all the properties it owns.

Today, with the downturn depressing property prices, based on current yields in India, one can expect to earn 7-9 per cent by way of rental income over the fund’s life.

You may enjoy capital appreciation as well on exit. But why not invest directly in a property and lease it out to a tenant, you may ask.

All one needs is a broker who can find the property and the tenant.

Yes, investing directly allows you to be the sole or joint owner of the property, but it also involves a lot more effort.

Can’t I go solo? You have to first identify a location and a property with sound growth potential and do the due diligence. Then, you must register the property, after which you have to scout around for good tenants. Maintenance too will be your responsibility.

You may find yourself running from pillar to post to enquire if the builder has an occupation certificate, completion certificate, clearance from the the municipal corporation, and so on.

Remember, it is hard-earned money and you would not want to lose it due to some errant builder’s vested interests or lack of information shared by the previous owner.

Not for first-timers A PE realty fund, however, cannot be an investor’s sole investment in real estate.

He should first complete purchasing his own house or land that will secure his future and only then consider investing in a PE fund. So if you already own property and have a surplus of ₹1 crore to spare, for four-seven years, investing in PE makes sense for you. Though the fund will issue payouts to you on a regular basis, one needs to have a sufficiently long holding capacity. In sum, the commercial real estate industry in India and abroad over the last decade has dynamically transformed into a lucrative investment destination for individuals. It is every person’s aspiration to own properties across the globe, but not many can make this a reality.

A real estate PE fund provides one with this option. Taking this hassle-free option and turn your dreams into a reality.

Trends in micro markets

In India, the commercial real estate market is under stress as rents have bottomed out. However, rental income is expected to improve significantly in the near future. Micro markets, mainly catering to IT/ITeS buildings, are however witnessing increasing demand.

Bangalore: Outer Ring Road continues to remain the most preferred market for expansion by IT/ITeS companies mainly due to availability of Grade A office spaces and supporting infrastructure. Also areas like Hebbal in North Bangalore are favoured due to availability of land parcels and upcoming residential townships. Other upcoming micro markets that are slowly gaining popularity include Sarjapur and Whitefield due to the existing IT presence as well as lower commercial rental values.

Mumbai: Mumbai has always been a popular destination for corporate and MNCs for setting up their head offices. Important micro markets include Parel in Central Mumbai, which is a popular destination owing to its large supply of land due to redevelopment of mill land in the area.

Rentals are also cheaper and quality of construction good. In the Western suburbs, the stretch from Andheri to Malad is popular.

NCR: In Gurgaon, Sohna road and Southern Peripheral road are fast emerging as popular commercial hubs owing to the large availability of land.

In Noida, commercial areas around the Noida expressway are preferred for IT/ITeS and back-office operations.

Kolkata: Salt Lake sector V is currently the favourite destination for commercial offices, with MNC tenants and long leases.

Another upcoming area in Kolkata is Rajarhat/New Town. With the Kolkata Metro set to link Rajarhat with the rest of the city, the next five years will witness increased interest for commercial occupiers.

Chennai: In Chennai, the central business district (CBD) areas of Anna Salai, T Nagar, Alwarpet and Nungambakkam are popular among financial services and IT companies for small-to-medium sized office spaces.

The writer is Vice-Chairman and Director of Milestone Capital Advisors Limited

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