CPPIB, Blackstone, other investors bet on malls for better yields

CPPIB's investment could be continuation of the trend the country had seen last year

Canada’s largest pension fund manager Canada Pension Plan Investment Board (CPPIB) on Tuesday said that it would invest an additional Rs 9.38 billion into the Island Star Malls Developers, the mall investment platform it co-owns with The Phoenix Mills.

Through this second tranche, CPPIB has increased its investment into the platform to a total of Rs 16.62 billion for a 49 per cent ownership stake, with Phoenix Mills owning the balance.

“The additional funding will allow the platform to undertake new developments and acquisitions, creating new retail-led mixed-use assets that will offer superior shopping and entertainment experiences,” CPPIB said while making the announcement.

CPPIB’s investment could be continuation of the trend what the country had seen last year. According to real estate consultancy JLL, retail properties have seen private equity (PE) investments of over $750 million in 2017, almost double the figure of 2016.

US PE giant Blackstone had acquired eight malls in the past two years and a portfolio of over five million sq ft. It plans to take it to seven million sq ft. It has a set up a separate company, Nexus Malls, to operate these malls.

According to reports, it is looking to buy three malls in different parts of the country.

CPPIB-Phoenix Mills alliance bought a land parcel in Pune last year for Rs 1.61 billion. Virtuous Retail South Asia, a joint venture between Xander and Dutch pension fund APG bought a mall in Chandigarh last year and looking to buy malls.

Balaji Rao, managing partner for real estate, Axis Asset Management company, said a successful mall offers better rental yield than an office complex. “A office building offers yield of 8-9 per cent while a good mall offers 9 -10 per cent,” Rao said.

Rao added investors were chasing malls that are well-formatted and -managed. “Investors are also betting on shift of unorganised to organised retail in the country,” he said.

According to JLL, retail sector is estimated to grow to Rs 1 trillion by 2020, at a compound annual growth rate of approximately 12-15 per cent. 

Shobhit Agarwal, managing director and chief executive at ANB Capital Advisors, said while the country had decent supply of retail malls, there was still dearth of well performing retail malls. As a result, quality retail malls have been gaining traction across the country since the past few quarters. 

“Unlike office space, investors are not restricting themselves to top seven to eight cities. With the economy showing improvement, the disposable income has started finding ways to branded goods leading to better performing retail malls, irrespective of their city. Also, the expectations from malls owners, especially tier II and tier III cities, are still not very high and hence, allowing good entry points to the investors,” Agarwal said. 

According to JLL, the year 2017 saw withdrawal of nearly 5 million sq ft of retail space with a closing down of 28 malls. 

Most of the rationalisation took place in the markets of Delhi–National Capital Region and Mumbai, owing to the fact that these markets had significant mall stocks with a considerable percentage of the same performing below par, it said.