Diversifying Investment: PEs shift focus back to retail real estate funds

With an aim to create a portfolio of assets as the Indian market expands, some leading global PE funds have started investing in retail sector.

Written by Ramesh Nair | Published:November 4, 2017 1:54 am
Investment, Diversifying Investment, eal estate, real estate investment, housing, housing investments, real estate funds, Private equity, indian markets Joint venture (JV) partnerships and strategic investment platforms have also come under focus during the
last 15 months.

After a few years of reduced focus on retail real estate, largely due to the limited supply across India, private equity (PE) players are again focusing on these assets with over $724 million invested in 2017 (through September) alone. Compared to the total investment of $1.57 billion between 2015 and September 2017, this chunk shows how the PE focus is changing as they aim to diversify portfolios.

With an aim to create a portfolio of assets as the Indian market expands, some leading global PE funds have started investing in retail sector. This includes all types of investment such as platform and entity-level deals as also acquiring stakes in leading malls across cities.

The most recent example is of Blackstone forming an India subsidiary named Nexus Malls, which includes a retail portfolio as well as stakes in successful malls like Seawoods Grand Central, Ahmedabad One, Mall of Amritsar, Elante Mall, Treasure Island Next, Treasure Island Indore and Westend.

Joint venture (JV) partnerships and strategic investment platforms have also come under focus during the last 15 months. For instance, Xander group’s Virtuous Retail (VR) and APG Asset Management have formed a JV called Virtuous Retail South Asia (VRSA). The latter recently acquired North Country Mall in Mohali. With this acquisition, VRSA expanded its portfolio that now includes VR Bangalore, VR Surat, North Country Mall and an upcoming mall in Chennai.

Canada Pension Plan Investment Board (CPPIB) and The Phoenix Mills Limited also joined hands to form a strategic investment platform for development of greenfield and brownfield retail-led assets in India. Island Star Mall Developers, a Phoenix Mills subsidiary that owns Phoenix Market City Bangalore, will serve as the platform for this alliance.

Platform deals to form strategic retail partnerships are expected to see more traction in the coming quarters. In these deals, the track record of a developer and their operational processes, is the key selection criteria of investors. The global investing partner brings expertise in managing international retail assets and thereby, international best practices. The local partner or the mall developer contributes in terms of local market understanding and leverages existing, strong on-ground teams.

The developer partner gains as this funding is used to optimise assets and upgrade all functions of the malls’ operations. In certain cases, the developer can also monetise their non-core assets, generating cash flows for future developments. These funds can be utilised to buy other assets to expand the portfolio. With the help of an experienced international investor partner, the developers also have the advantage in terms of securing favourable lease terms and achievement of cost savings through optimising operational efficiency.

Another positive fallout is that this will bring in more transparency and improvement in operating environment of shopping malls in terms of financials and regular churn of the tenant mix. Institutional investors have medium-to-long-term perspective and therefore will evaluate brands from that viewpoint.

Rising investment in retail assets is a wining proposition for all stakeholders — consumers, retailers and developers. It will help create international standard retail spaces that consumers aspire, and retailers look out for.

The writer is chief executive officer & country head, JLL India

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