Indian real estate has continued to be an attractive asset class for investments as far as foreign investors are concerned. The sector’s woes as far as demonetization, GST and RERA over the last few years, have turned out to be its biggest blessing in disguise. Naturally, these measures have led to a major clean-up of the sector, making it more transparent, shoring up accountability and winning the confidence of foreign investors. In 2019, a boom was noticeably observed in the commercial real estate segment where several foreign players are in a clear rush to snap up lucrative assets, driven by India’s growing IT, ITeS and ecommerce sectors while retail, logistics and warehousing are also benefiting from recent growth.
At the same time, buoyed by measures taken by the Government including interest subsidies under PMAY, lower GST rates and other sops, residential real estate is witnessing a clear predominance of end-users as opposed to speculative domestic investors which has benefited the market. The affordable and mid-range housing segments are growing steadily in sync with demand while luxury and premium housing segments are also making a comeback, spurred by increasing demand from NRIs and other foreign investors. At the same time, new growth sectors are emerging for Indian real estate including co-living, co-working and student housing among others.
In this scenario, Japanese investors have been playing an active role in India’s real estate sector with several companies inking mega deals here in recent times. More Japanese companies and investors are expected to flock to India’s real estate sector over the next few years due to the prospects of earning attractive future returns from a long-term perspective and the huge growth potential of the sector which contributes significantly to the Indian economy.
Indian real estate market attracts Japanese investors in large numbers
Several Japanese funds and other investors have been eyeing growth opportunities in Indian real estate for a while now and several of them have already entered the market in some way or the other. Attractive future returns and other similar prospects are key factors drawing more Japanese funds to the sector while real estate developers are accepting this capital as a long-term monetary source which ensures more stability as a result. Some of the key Japanese entities and funds looking to increase their investments in Indian real estate or invest anew into the sector include big names like Sumitomo Corporation, Genkai Capital, Mitsubishi Corporation and Mitsui Fudson. Several Japanese developers and investors are also looking to scale up investments in India’s real estate, going by the fact that India is the biggest economy in Asia at the moment.
A major chunk of investor capital is flowing towards commercial real estate but residential real estate opportunities are also being considered by Japanese companies as per reports. Experts feel that Japan is India’s third biggest investor and investors from Japan are looking at investing in projects for the long haul. This makes the commercial real estate segment more favorable for leveraging Japanese skills and expertise according to industry players. RMZ Corp, for instance, has recently tied up with Mitsui Fudosan, the renowned Japanese developer of global real estate, for a commercial project to the tune of $1 billion in the country. More such deals are to be expected in the near future according to experts.
The Government has ensured ample support and a favorable investment climate via its CEPA (Comprehensive Economic Partnership Agreement). This has helped in developing better relationships between Japan and India with bilateral ties expected to grow even more over the next 5 years. This will be more apparent with India aiming for building a $5 trillion economy in this period. Experts feel that money flowing in from Japanese investments is long-term capital for a period of at least 8-12 years on an average. They also feel that Japanese investors have sizable appetite for risks and mostly seek equity based transactions in Indian realty across various asset classes.
Key trends that you must note in this regard
Mitsubishi Corporation from Japan, for instance, has recently forayed into the Indian real estate sector. It has pumped in a whopping Rs. 180 crore for a large-sized residential project that is being built by Shriram Properties at Chennai. This deal took place in the year 2018 and was a major one for the city’s real estate sector. IRR to the tune of approximately 18% on investments is what most Japanese investors are seeking from the Indian real estate market according to several experts. With higher transparency in business dealings, more Japanese investments will flow into the sector over the next few years according to them.
Sumitomo Corp from Japan also recently set a milestone for the biggest land deal in India last year. The company purchased a land parcel sometime earlier, spanning 3 acres at the Bandra Kurla Complex (BKC) in Mumbai. The transaction was concluded for a whopping Rs. 2,238 crore and the plot was bought from the MMRDA (Mumbai Metropolitan Regional Development Authority). Japanese funds will now be offering sizable investment funds for real estate developers in India and 2020 may witness further acceleration in this regard. Investments in the Indian real estate sector started with funds based in Singapore and they were followed swiftly by funds from Europe and the United States. Between the years 2005 and 2008, the real estate sector garnered investments of a whopping $5.7 billion as per reports. Yet, most funds withdrew from the Indian market post the year 2008 since there was limited scope for exits.
Reports also state that between 2005-14, foreign PE (private equity) investments in the Indian real estate sector touched $9 billion. In the last 5 years, investments by foreign entities went up by a whopping 84%.
More details on the Mitsui and RMZ joint venture
Mitsui Fudosan from Japan and RMZ Corp have inked a joint venture (JV) deal of up to $1 billion for establishing commercial office spaces at Mumbai, Bangalore and Delhi according to reports. This is the first investment by the Japanese entity in the Indian real estate space. The companies will initially develop office space of 3.5 million sq. ft. at the Outer Ring Road in Bangalore which is one of the most popular micro markets in the country and a stretch that is filled with MNCs and other corporates such as Accenture, Cisco, Intel, ANZ Bank, JP Morgan and Goldman Sachs among others.
RMZ Corp has outlined its blueprint of Hyper Growth- Vision 2025 and this venture is in sync with the same as per the company management. RMZ Corp is targeting AUM (assets under management) of a whopping 85 million sq. ft. and already has 15 million sq. ft. of projects being built across major Indian cities with 16 million sq. ft. being completed already. The latter portfolio ensures rental income up to Rs. 1,200 crore every year. This joint venture will be infusing 15 million sq. ft. into the company’s real estate portfolio as well. RMZ Corp has been holding discussions for a long time with CPPIB (Canadian Pension Plan Investment Board) and Mitsui for quite some time, with a view towards on-boarding both entities as investors.
Mitsui owns several properties located in North America, Asia and Europe. These include 527 Madison Avenue at New York City and also London’s Angel Court property. Ecoworld 30 is the entity’s first partnership with RMZ Corp as it seeks to scale up its Indian portfolio over the next few years. This could well be the first of many deals in the next few years as per reports.
An overview of the mega property deal at BKC
Sumitomo, the noted Japanese company, has acquired 3 acres at Bandra Kurla Complex (BKC), Mumbai, for a whopping Rs. 2,238 crore. This is the costliest land deal in the country on the basis of price paid per acre. The Japanese company has paid approximately Rs. 745 crore for each acre of this plot. MMRDA has already confirmed that the plot adjacent to Reliance Jio Gardens was listed for sale quite some time earlier although it could not draw bidders immediately. This landmark investment is being hailed by Indian real estate developers as a sign of the increasing confidence of Japanese investors in the long-term growth prospects of Indian real estate. More than the transaction price, it is a positive development since Japanese firms are highly patient in terms of handling and deploying capital. The bid from Sumitomo was the only one garnered by the MMRDA for this plot, making it all the more exciting.
The reserve price for this area is already very high, leading to a final deal of gargantuan proportions. The second highest deal seen sometime earlier was in the year 2010 when the Lodha Group offered a bid amount of Rs. 4,050 crore for the 6.2 acre land parcel at Wadala. This worked out to Rs. 653 crore for every acre as per the MMRDA’s reports. The BKC (Bandra-Kurla Complex) is a prime commercial hotspot in Mumbai and one of its poshest office hubs after Cuffe Parade and Nariman Point. 300+ buildings are situated in the BKC including government and private offices alike. The growing predominance of BKC as Mumbai’s foremost business district is drawing huge investments by leading business conglomerates and foreign entities.
UNIQLO enters Indian market
With Japanese real estate investors and companies having zeroed in on the Indian property market in recent years, several segments have been drawing sizable interest of late including retail. Big corporations like Mitsui Group, Mitsubishi Corporation and Sumitomo Corporation are looking to develop and purchase commercial properties in major Indian cities as per reports. They are looking to hold onto properties for a long period of time in a bid to earn handsome rental yields.
In recent times, Indian retail segments have also been witnessing decent growth in spite of economic fluctuations over the last couple of years. UNIQLO, the clothing conglomerate from Japan, has already opened its very first Indian store at the Ambience Mall in Vasant Kunj, New Delhi, in the month of October last year. UNIQLO attained the global spotlight even more after snapping up Roger Federer who discontinued his long-term association with Nike. Initially named Unique Clothing Warehouse, UNIQLO was launched formally in the year 1984 in Hiroshima, Japan. The parent entity, Fast Retailing, is one of the largest global retail organizations with projected sales volumes of roughly $28 billion by end-2020.
UNIQLO is betting on the long-term profitability of its investment in India, particularly in purchasing real estate for expanding its stores. The brand is expected to choose prime or rapidly growing locations in major Indian cities for its next growth phase. The Government’s landmark move to reduce corporate tax rates to 22% from 30% and also the relaxation of the 30% local sourcing regulations for single-brand retailers, has done wonders for Indian retail in terms of attracting foreign investors. UNIQLO has also hailed the decision of the Government with regard to FDI (foreign direct investments) and is looking at beefing up its market presence here accordingly.
The core take-away
All in all, the Indian real estate sector has profited immensely from increased Japanese investments and this association is set to grow over the next few years as well. In fact, with more REITs (Real Estate Investment Trusts) in the offing, Japanese firms may look to play a leading role there as well. Some entities are inking joint development contracts with Indian developers while some are looking to purchase and develop commercial assets with an eye on attractive long-term returns. This could pan out very well for Indian developers in need of more funding for pursuing future growth opportunities.
The Government’s emphasis on increased transparency and accountability in Indian real estate has done a world of good for the sector. Real estate in India is now more attractive and transparent for global investors and this will only enhance its growth prospects over the next few years according to experts.