declining capitalization rates in storage facilities; Investors trade returns for future growth prospects

According to bankers and investors who deal in such real estate, capitalization rates or capitalization rates for warehouse properties have dropped from 8-8.5% a few years ago to 7% now.

The cap rate is the interest rate that helps evaluate a real estate investment. It is calculated by dividing the property’s net operating income (NOI) by its property value.

The reason: More and more institutional investors are focusing on growth in the inventory sector, which currently only has a limited number of Grade A shares. These investors are trading lower returns for future growth, experts say. Warehouse real estate is growing faster than office real estate and the inventory currently accounts for half of the total office stock in the country.

Last year, when US-based Morgan Stanely and Pragati formed a platform with Hillhouse Capital, they completed the deal at a 6.9% cap rate. Also when GMR recently sold storage assets to Indospace Core, a joint venture between Canadian fund CPPIB and Indospace, the cap rate was 7.1%. Indospace Core acquired the 800,000 square meter Amazon Fulfillment Center in Hyderabad from GMR Group.

An email sent to Indospace did not trigger a response.

When the Mirae Asset Credit Opportunities Fund acquired a $130bn Mumbai-based industrial logistics and warehousing property earlier this year.

According to sources, Allianz and ESR, which plan to sell their shares in a joint venture here, expect a yield of 7.25-7.30%.

Global investment giants such as Blackstone Group, Singapore fund GIC, Gaw Capital, Canadian pension fund OMERS and others have made bids to buy shares held by Allianz and ESR. An email sent to ESR India did not trigger a response.

“More people are now willing to give money for lower returns. Institutional investors’ return expectations are low and they favor stable and stable asset classes such as warehousing,” said Prateek Jhawar, Managing Director and Head of Infrastructure and Real Assets at Avendus Capital.

Jhawar said the market is consolidating with serious players who could build Grade A warehousing properties. “Pure private equity players won’t come as warehousing is not an opportunistic and speculative endeavor,” he said.

Shobhit Agarwal, Managing Director of Anarock Capital, said stocking capitalization rates are falling as there is too much capital chasing limited stock. “In addition, there were international increases in warehouse rents in the double-digit range, and for offices also in the low single-digit range. Investors expect similar escalations for Indian warehouses. Against this backdrop, they are happy to settle for lower current yields in exchange for potentially higher growth in the future,” Agarwal said.

He added that they don’t expect supply to rise as quickly as warehousing remains a supply-constrained market due to a lack of suitable land for this purpose. “If the sector grows 8%, investors believe they can close the deals with a 7% cap rate.”

Yogesh Shevade, Head of Logistics and Industry at JLL India, said cap rates remain under pressure as both existing and new large institutional investors are keen to get exposure to India’s fast-growing inventory sector, which is being fueled by rising consumption patterns and economic headwinds “Combined with the limited supply of high quality A-grade warehouses on the market, this could lead to a further decline in cap rates over the medium to long term,” Shevade said.

Inventory caps in India are likely to remain in the low single digits, he said.

Hemant Prabhu – Chief Operating Officer (COO) of Hiranandani Group’s Greenbase Industrial and Logistics Parks said global fund players are attracted to Indian assets and are betting on development risks. With innovative structuring, they are ready to work together while mitigating regulatory risk and delivering higher returns. In such volatile times, investors can exercise caution when reviewing their portfolios, but also want to maximize the chances of catching good deals with better returns.

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