The real estate sector in India is ringing, and as a result, Private Equity funds are keen to expand their scope of investment. This is good news for property developers in Bangalore as better days are coming. Business friendly government and pragmatic policies are key factors that are driving Private Equity investments in Bangalore realty sector of late. A major development is that Private Equity funds are showing interest to fund not only Grade ‘A’ developers in Bangalore, but also extend the facility to even Grade B developers in the city. However, they plan to do it in a structured way.
During the first half of 2014, real estate sector of Bangalore has received a Private Equity (PE) investment of almost INR 2, 005 crore, the highest in the country, beating the national capital Delhi and Mumbai, which has long been the commercial capital of India. Owing to increased demand for leased office assets from institutional investors and growing residential sector, PE investments in Bangalore have jumped almost 20 times year-on-year to INR 2, 005 crore.
The city has received Private Equity investments worth INR 103 crore during first 6 months of 2013. During the same period, Mumbai received INR 1, 140 crore, Delhi – NCR received INR 490 crore, and Chennai INR 200 crore. It is the availability of investment-worth leased office spaces and stable returns that have kept the interest high for PE investment in Bangalore. Considering the current trend, the share in total PE investment is expected to grow in Bangalore in years to come. Most of the leased office assets are primarily attracting institutional investors because they have a high occupancy rate and deliver stable yields of about 9%, making them a lucrative option to invest.
Key Drivers for Bangalore’s Real Estate
The major reason behind the significant growth of Bangalore’s real estate is the rapid growth of both commercial office spaces and residential assets. As the demand for office space is increasing at a fast pace, residential demand continues to grow at a steady space, but both the sectors are driving the market to make Bangalore a realty powerhouse of India. The key driving force here is that Bangalore is the hub of South India and a booming IT center, which has been attracting high-profile property developers from around the world. The Silicone Valley of India houses leading IT/ITES companies, MNCs and national corporate houses, which has lead to a radical growth in demand for leased office spaces as well as residential projects.
Higher Private Equity investments in Bangalore can also be attributed to easy availability of real estate properties across all segments at a lucrative and reasonable valuation. Furthermore, it is also easier and hassle-free to underwrite projects in Bangalore as ticket size is reasonable as compared to other metropolitan cities. The huge influx of the working population, as a result of the booming IT sector, is another reason why Bangalore’s real estate market is expanding at a rapid pace. Radical infrastructure growth, smooth connectivity, political stability, and excellent quality working professionals are the major factors that are driving more and more IT/ITES companies and MNCs to open their offices in Bangalore. As such, demand for office spaces for lease and commercial properties is increasing rapidly.
Bangalore is the hub of South India and a cosmopolitan city that features significant infrastructure growth, improved connectivity with other cities, salubrious climate, and modern comforts that make the city worth living. There are more than 5400 schools and 620 colleges in Bangalore, resulting in excellent quality of education and living standard. 90% of the population belongs to the working class, with average to high disposable income. It has 31 industrial hubs that include PSUs, IT/ITES, Engineering, Bio-technology, Textile, Aviation, and other companies. Besides these, Bangalore’s core end user market and lucrative investment returns make it most preferred choice for Private Equity investors.
Bangalore has emerged as the top city in India for commercial office market in 2013 with total office space consumption of 8.3 million square feet, witnessing nearly 32% growth year-on-year. In fact, the absorption rate almost tripled during the second half of 2013. This clearly indicates that a large number of corporate houses across different sectors are moving towards their expansion plans or consolidating their realty footprint in Bangalore’s cost-effective micro-markets. On the other hand, the first half of 2014 witnessed the office market growing stronger over 2013, with the second half seeing more than 100% growth in office space absorption rates quarter-on-quarter.
Private Equity Investment Trend
Over the last few months, the Bangalore real estate sector has seen maximum private equity investment, which is radical in recent times. Major Private Equity firm Red Fort Capital is already investing in a residential project, whereas there has been over US $300 million investment by a joint venture between the Embassy Group and Blackstone. Prestige City Properties, a part of Prestige Estate, is also investing almost US $60 million in prime land parcel for residential purpose.
Bangalore has also been successful in attracting PE funds from Qatar and Bahrain. Singapore’s sovereign wealth fund, Brigade Group and GIC, have also invested Rs 1, 500 crore for residential investments. However, most of private equity investments in Bangalore are in the commercial arena, followed by residential projects and retail space. Moreover, investments in commercial projects have been primarily in income-generating and well-leased assets, which guarantees potential for capital appreciation and stable yields. With relaxation in FDI norms and establishment of Real Estate Investment Trusts in India, the cost of funding commercial assets will further come down, thus, opening up the sector eventually for private equity investments.
With radical growth factors and rapid increase in demand for commercial assets, followed by residential projects, Bangalore real estate is emerging as a hot spot for private equity investments. The city is already seeing huge investments from leading PE firms and will further see rapid developments as the commercial sector is being opened up for investments further, promising stable yields and good capital appreciation. The years to come will certainly bring a smile on the faces of Bangalore’s property developers, with Foreign Direct Investments as well as Private Equity funds making its place in the real estate sector.