Distressed office projects emerge as good buyout options


Bengaluru: Distressed office assets are emerging across cities, throwing up opportunities for large developers backed by private equity (PE) funds to buy into incomplete or stalled office projects, special development enclaves or undeveloped land, a trend that has played out in the residential sector in recent years.

Bengaluru-based Embassy Group is buying out a 60% stake in a stalled special economic zone (SEZ) in Chennai’s Pallavaram area, in a transaction that is expected to conclude soon. In a revenue-sharing arrangement, Embassy will pay an initial deposit of Rs.60 crore to Hyderabad-based SNP Infrastructure Ltd, which built the basement of a few buildings in the SEZ and then decided to not continue with the project.

“Embassy is going to invest about Rs.1,400 crore to construct the project, about 4.5 million sq. ft in area, over the next 5-6 years,” said a person familiar with the development, who didn’t wish to be named.

Despite the gloom-and-doom situation in India’s residential sector in recent years, the office space has fared relatively better. A number of large developers, with a background in building office projects, are now mainly focusing on these, while smaller and mid-sized developers, who don’t have the operational competence to build such projects or the financial bandwidth to stay invested in them, are looking to exit fully or sell stakes to the former.

Mumbai-based Tata Realty and Infrastructure Ltd (TRIL), a subsidiary of Tata Sons Ltd, and its investor partner, Standard Chartered Private Equity, are looking at both greenfield opportunities as well as brownfield projects, where they can step in and take over.

TRIL’s managing director Sanjay Ubale said that they are evaluating all kinds of assets in mostly Tier I cities.

There are mainly two dominating trends in the office sector—one, buying out of built and leased office assets where global PE investors such as Blackstone Group Lp predominantly operate and, second, buying land to build greenfield office projects.

In one of the biggest transactions in commercial office space this year, DLF Ltd, India’s most valuable property developer, has sought expressions of interest from several top global investors to sell a 40% stake in its rental assets arm as it seeks to pare debt. The rental assets arm holds about 20 million sq. ft of leased-out office space and is valued at about $2 billion.

“While there are many such opportunities to buy projects that are incomplete and stalled, and we are open to them, the most critical factor for us would be to get the right partner,” said Vinod Rohira, managing director, commercial real estate & REIT, K. Raheja Corp.

Pune-based Panchshil Realty Ltd, which has partnered with Blackstone for some of its projects, is in talks to take over a brownfield project in Mumbai. Panchshil chairman and chief executive Atul Chordia said that Mumbai has many such so-called distressed office projects, where developers are looking for new partners and investors to come in and enter into joint development agreements or buy partial stake.

Prominent office developers are evaluating projects in top property markets such as National Capital Region (NCR), Mumbai, Hyderabad and Chennai. Bengaluru-based developer RMZ Corp. bought over a partially stalled project in Chennai from a Kolkata-based firm last year and is looking at similar deals in Mumbai, Delhi and Chennai.

RMZ managing director Raj Menda said that while there are many opportunities, the question is if it is at the right price. “This year we will see more such under-development office asset deals along with buyout of completed assets. These are slow times for the sector and it’s a matter of time when someone has to let go. Our model is to take 100% control in a project we like, or do a joint development where the assets are clearly divided between the partners,” Menda said.

Property analysts also believe that commercial real estate will also witness the kind of consolidation and collaboration that the residential sector has undergone in the last two years. Though commercial office projects are doing far better than their residential counterparts, the capital-intensive development and niche skills needed for the former will see only a few large developers remaining in the fray over a period of time, they said.

“Commercial office is a niche game and many developers will find it tough. Unlike residential, it is a B2B (business-to-business) and not a B2C (business-to-consumer) business, where a developer needs the skill to build and then lease it out to corporate groups and operate them over a long tenure,” said Juggy Marwaha, managing director-south, JLL India, a property advisory.