US funds turn cagey on Indian real estate

Big deals in commercial real estate have slowed down significantly as US investors in such properties have turned cautious due to reasons ranging from looming recession in the American economy, rising interest rates, inflation, and mismatch in cap rates, fund managers and investment bankers said.

Besides a couple of big names such as Blackstone and CPPIB, it is mostly investors from West Asia and Southeast Asia such as GIC, Mapletree, CapitaLand and others who are the most active investors in the real estate now, bankers said.

“US investors want to hold and see when rates will peak and how the Fed will behave in the next six to nine months,” said Pawan Swamy, chairman and managing partner at Credberg Investment Management, a real estate private equity firm.

Swamy said another key reason for the halt in big deals is the mismatch between cap rate expectation between investors and sellers. Cap rate is the ratio between the annual rental income produced by a real estate asset to its current market value. It is used to assess profitability and returns from investments.

“While sellers want lower cap rates, investor/buyers are looking to buy at a higher cap rate. Investors’ view is that the increase in interest rates should get reflected in the cap rates while sellers are justifying a higher ask by saying cashflows and quality of assets are same, so cap rates shouldn’t go up,” Swamy said.

Shobhit Agarwal, managing director at Anarock Capital, said American investors in Indian real estate have slowed down their activities for two reasons. Firstly, the year-end usually sees them take a break after ongoing deals are consummated. Secondly, the US currently faces a double whammy of looming recession and rising inflation.

“This is bound to impact investment sentiment. The prognosis may change in the coming quarters, but for now, it is definitely one of caution,” Agarwal said.

However, US investors say its opportunities back home that are keeping them busy. “US investors are slightly hesitant in doing deals here as they are getting better returns in their home country. Private credit and private equity deals are happening but real estate deals are slow,” said a managing director of a US-based investment firm who did not want to be named.

Agarwal of Anarock agrees: “Income-yielding assets here compete with such assets globally. If cap rates here are between 7.5 and 8.5%, in the US, they are at 6%. Obviously, investors look to invest in their own markets, he said, adding that only existing US investors are doing deals here and not new investors.

Agarwal said the dollar value comedown after adjusting currency risk and country risk makes return unattractive in a foreign country vis a vis the US.

However, Ajay Jain, chairman and managing director at investment advisory Monal Capital, believes that a lot of US funds are still chasing Indian properties.

“The US is still struggling with Covid-19 and deep economic recession. This has led to lower investment opportunities within the country. India becomes a preferred destination for investment due to continued easing in FDI regulation in various industries, favourable capital market conditions,” Jain said.

Indian markets are witnessing excellent return over investment vis a vis other countries in real estate. Due to the increase in residential, shopping, commercial and warehousing outlook, huge money is chasing good projects from investors world-wide, particularly more from the US, he said.

Singapore-based Mapletree Investments recently acquired the assets of a logistics park owned by KSH Infra Industrial Park, a subsidiary of Pune-based KSH Infra Group, for around `320 crore,

concluding the full acquisition of the 1.2 million sq ft park.

It also bid for Waverock property owned by the Shapoorji Pallonji-Allianz group joint venture (JV) .

Similarly, Singapore-based CapitaLand formed an office development JV with L&T Realty.

CapitLand India Trust Management, the trustee-manager of CapitaLand India Trust, recently said it plans to invest around `1,940 crore over the next four to five years, to acquire and develop a 55 megawatt data centre in Ambattur, Chennai. GIC formed a $600-million joint venture with warehousing developer ESR recently.