Investors bet on smaller leased office properties

Ganesh Kumar, a real estate consultant in the Andheri area here, recently bought a 2,200-sq-ft property in Pune and leased it to a financial services firm. “I invested in office property for the first time. I am getting returns of 12-13 per cent, which is very good,” Kumar says.

Kumar is not alone. When global investors such as Blackstone and Xander are lapping up large infotech parks and special economic zones (SEZs), high networth individuals (HNIs) and non-resident Indians (NRIs) are increasingly buying commercial properties ranging from 2,000 sq ft to 20,000 sq ft for leasing.

The rationale: By buying and leasing properties available at lower prices now, they are ensured of a steady rental income.

‘SMALL’ BET

• Mumbai alone has seen deals over Rs 2,000 crore in the last one year
• Pune, Bangalore & Gurgaon are also seeing deals in leased assets
• Buyers are looking at yields of 9-12%
• Rents have fallen 30-40 per cent since 2009, pushing down values in Mumbai

In the country’s commercial capital alone, leased assets worth over Rs 2,000 crore have been bought and sold in 2013, estimates Viral Desai, director, occupier solutions group at Knight Frank.

Mumbai absorbs six-seven million commercial properties every year, of which leased properties constitute a fourth.

According to realty consultants, sales of smaller leased office properties have gone up 10-15 per cent in the last one year. Fall in prices has increased interest in investors, say consultants. According to global consultant Knight Frank, prices in the city’s cental business district (CBD) adjacent areas have fell nine per cent in the third quarter of 2013 and four per cent in the alternate CBD of Bandra-Kurla Complex and Bandra. Normally, rents are 10 per cent of the capital value for commercial properties.

Says Desai of Knight Frank: “Rents have gone down 30-40 per cent since 2009 and capital values have not gone down but not to the same extent. Investors are looking to buy assets at nine-10 per cent yields.”

Added Ashok Kumar, managing director of Cresa Partners, a commercial realty services firm: “Today, rates being attractive, people are looking to buy distressed assets that give assured returns. There is a lot of demand for properties for leasing to companies, including multinational.”

Cresa recently helped two investors buy 17,000 sq ft in the Whitefield area in Bangalore and another 12,000 sq ft in Gurgaon.

“If assets are locked in for three to five years, one can look at a steady income,” Kumar added.

Knight Frank’s Desai said since buyers ask for lower rents, developers could give rent-free periods to tenants, so that the headline price might be maintained.

Developers can give a six month rent-free period, while giving a property on rent for 60 months, effectively giving a 10 per cent discount to tenants instead of cutting rents, which would lead to lower capital values, Desai said.

However, Desai cautions the pre-leased market was small, given that it was difficult to find right tenants, right property and right capital values in a city like Mumbai.