IL&FS Milestone Realty Advisors Pvt. Ltd and Morgan Stanley are among those looking to buy a Rs.550 crore commercial asset of Kotak Realty Funds Group (KRFG) in suburban Mumbai, said two people familiar with the development.
KRFG, the private equity fund of Kotak Mahindra Bank Ltd, bought the multi-tenanted, Goregaon office building in 2006 for Rs.200 crore from K Raheja Constructions, and is now planning a complete exit by selling it off to a single investor.
The fund will evaluate offers made by IL&FS Milestone and Morgan Stanley and the deal is expected to close by December, said one of the persons mentioned above.
“This has been a phenomenal investment for Kotak with an internal rate of return (IRR) in excess of 40% and (the asset) is a marquee property with stable rentals,” he said.
Milestone Capital Advisors Ltd said in an emailed statement that “as part of the IL&FS Milestone Fund due diligence, it has been evaluating (a) number of properties including this one”.
Morgan Stanley didn’t respond to questions sent on Tuesday.
Rental yield-generating assets with a relatively low risk such as this one will be the way forward for funds investing in commercial real estate, analysts said.
Typically, in such properties, investors benefit from the steady monthly rental flow.
This June, in one of the larger commercial property deals of the year, IL&FS Milestone, a joint venture between Milestone Capital Advisors and IL&FS Investment Managers Ltd (IIML), paid Rs.575 crore for a 74% stake in 247 HCC Park, a property developed by HCC Real Estate Ltd, a subsidiary of Hindustan Construction Co. Ltd, in Vikhroli, Mumbai.
“Yield-based investments have always remained attractive to investors since they carry lower risk as compared to under-construction projects,” said Kaustuv Roy, executive director, India, Cushman and Wakefield, a property advisory. “Commensurate with the lower risk profile, the yields are lower, and along with a reasonable capital appreciation over four-five years, offer a good investment product.”
A November report by Cushman and Wakefield said pan-India demand for commercial office space in the September quarter increased by 18% from the preceding quarter while supply was 11% lower in the same period owing to slow construction and project delays. However, the rise in lease rentals has been stable, growing at 3-9% in different micro-markets.
Milestone has also begun discussions on the sale of a stake in a Lower Parel property with Alok Realtors Pvt. Ltd, which the latter bought from Peninsula Land Ltd for Rs.1,100 crore.
“While the developer prefers to buy new stock, funds would prefer pre-leased assets and we are going to see more of these deals,” said Prakrut Mehta, national director, office and industrial agency, Knight Frank India, another property advisory.
Moreover, funds are looking at stable rent-yielding properties rather than those with unusually high ones, analysts said.
“It is important to keep in mind that when picking up such products, the intrinsic value of the asset needs to be at market price and marketable, and that the existing rents are within the market range,” Roy said.
This year, Kotak has invested Rs.250 crore in two projects of Emaar MGF Land Ltd and Rs.150 crore in Dheeraj Insignia, a residential project in Mumbai.
Source: Livemint