APG Asset Management, the Dutch pension administrator with approximately €352 billion of assets, has committed a significant share of the equity in a $300 million club fund focused on income-generating commercial office properties in India. The investment serves as another sign that some of the world’s largest institutional investors are cementing their positions in India, as commercial real estate exhibiting core characteristics emerges as an independent asset class.
The pension administrator is the lead among a consortium of other institutional investors that have backed the club fund, which is managed by Xander Investment Management, the investment arm of Xander Group, one of the country’s better-established real estate investment managers. The club fund could be increased to $500 million over time, the partners said, should they find enough investable opportunities that meet their quality and return criteria.
Sachin Doshi, APG’s head of non-listed real estate for Asia Pacific, told PERE that the club fund was expected to be used for acquiring commercial assets from developers and other owners that regarded them as non-core to their primary business. “Most developers still regard residential development as their core business and want to keep acquiring land for that,” he said. “Some of them have built quality offices in the past and could possibly look to monetize these assets to continue funding their development business. Others who build office still may not want to hold longer term, given the lack of permanent financing in India and the higher returns from development. Our partner has extensive relationships with groups like this.”
The structure of the club fund is closed-ended currently, but Doshi said it could become open-ended should there be enough opportunities that fit the bill. “Clearly, we like long-term exposure, but we are approaching this by seeing how the opportunities come. It will be opportunity-driven.”
Doshi would not confirm specific return targets for the club fund, but he predicted investments would yield double-digit returns on a net property income basis. “Total returns should be higher because there’s rental growth to consider, cap rate compression and prudent leverage.”
APG’s overall exposure to India real estate is low, understood to be less than 5 percent of its overall holdings in Asia. However, it has been building its presence in the country lately.
Last month, it increased its investment in New Delhi-based hotel company Lemon Tree to 13 percent from 5.6 percent for $50 million. APG originally invested in that company in 2012. The pension manager also is invested in a $200 million club fund with Godrej Properties, a middle-income housing developer.
Rohan Sikri, partner at Xander Investment Management, commented: “This is an appealing and scalable India strategy for long-term institutional investors to pursue, given there are no land assembly, approval or development risks and very low leverage. India is a high-growth market with extremely low liquidity, a combination that presents attractive investment opportunities.” He admitted, however, that the market has macro-level risks, which investors must work to mitigate. As one example, Xander “invest[s] through control positions and, in many cases, we are happy to buy assets outright and operate them ourselves; a capability we have painstakingly built in India over the last decade.”
The formation of this fund with a core-like strategy follows a similarly-themed vehicle introduced by Sharpoorji Pallonji Group, a Mumbai-based conglomerate, last year. That vehicle was backed with $200 million of equity from the Canada Pension Plan Investment Board, Canada’s largest non-state institutional investor.
Red Fort Capital, the private equity real estate firm, also currently is forming a core real estate fund to be initially wrapped around certain commercial investments held by its more opportunistic vehicles. The investors in the vehicles had requested the ability to retain ownership once those vehicles had expired.