Cap rates falling in warehousing assets; Investors trading off yields for future growth prospects

Cap rates falling in warehousing assets; Investors trading off yields for future growth prospects

Cap rates or capitalisation rates in warehousing properties have come down from 8-8.5% a couple of years ago to 7% now, said bankers and investors who deal in such properties.

Cap rate is the rate that helps in evaluating a real estate investment and are calculated by dividing the property’s net operating income (NOI) by its property asset value.

Also read: Brands expand retail footprint with online D2C channels

Last year, when US based Morgan Stanely and Pragati formed a platform with Hillhouse Capital , they did the deal at a cap rate of 6.9%. Similarly, when GMR sold warehousing assets to Indospace Core, a joint venture between Canadian fund CPPIB and Indospace recently, the cap rate was 7.1%. Indospace Core acquired the 800,000 sq ft Amazon Fulfilment Centre in Hyderabad from GMR Group.

A mail sent to Indospace did not elicit any response.

Earlier this year, when Mirae Asset Credit Opportunities Fund acquired a Mumbai-based industrial logistics and warehousing asset for Rs 130 crore, it did the deal at 7% cap rate, bankers close to the deal said.

Sources said Allianz and ESR which are looking to sell their stakes in a JV here are looking at an yield of 7.25-7.30%.

Global investing giants such as Blackstone Group, Singaporean fund GIC, Gaw Capital, Canadian pension fund OMERS among others have put in bids to buy the stakes held by Allianz and ESR. A mail send to ESR India did not elicit any response.

“More people are now ready to give money for lesser returns. Return expectations of institutional investors are low and they prefer stable and steady asset classes such as Warehousing,” said Prateek Jhawar, managing director and head -infrastructure and real assets at Avendus Capital.

Jhawar said the market is getting consolidated with serious players who can build Grade A properties in warehousing. “Pure play private equity players won’t come as warehousing is not an opportunistic and speculative play.” he said.

Shobhit Agarwal, managing director at Anarock Capital said that cap rates are declining in warehousing as there is a surfeit of capital chasing limited stock. “Further, internationally, warehousing rentals have delivered double digit escalations, with the same being low single digits for offices. Investors are anticipating similar escalations for Indian warehouses. Given that, they are happy to settle for lower present yields in exchange for potentially higher growth in the future,” Agarwal said.

He added that they don’t expect supply to ramp up in a hurry since warehousing remains a supply constrained market given paucity of land parcels appropriate for the purpose. “When the sector is growing at 8%, investors think they can do the deals at 7% cap rate.”

Yogesh Shevade, head of logistics & Industrial, JLL India said that the cap rates remain under pressure as both existing and new large institutional investors are interested in participating in the fast growing Indian warehousing sector, buoyed by rising consumption patterns and economic headwinds.” This coupled with limited supply of quality Grade A warehouses available in the market may further decrease the cap rates in medium to long term,” Shevade said.

The Indian warehousing cap rates are expected to remain in lower single digit, he said.

Also read: Pristyn Care launches AI-powered medical trainer to standardise healthcare training

Hemant Prabhu – chief operating officer (COO)- Greenbase Industrial and Logistics Parks by Hiranandani Group said global fund players are attracted to Indian assets and are betting on development risk. Using innovative structuring, they are ready to collaborate while mitigating regulatory risk and achieving higher returns. In such volatile times, investors may act cautiously in scrutinising portfolios, but they also want to maximise opportunities to secure good deals for better returns.