Global investors and developers flock to 'forward purchase deals'

Global investors and developers such as Ascendas, Proprium, and Xander are increasingly opting for ‘forward purchase deals’ in warehousing and office properties.

In forward purchase deals, the buyer pays an advance to the seller and gets into an agreement with the seller to buy the developed property at a future date. The advance is used to fund the construction. For instance, a residential developer uses buyers’ money to develop a project and the sale deed is executed later.

Leading the race for such deals is Singapore-based Ascendas India Trust, which is listed on the Singapore Stock Exchange. 
The company inked a forward purchase agreement to buy six warehouses with an area of 800,000 sq ft from Arshiya group in Panvel near Mumbai last year. In July this year, it executed a similar agreement to buy an additional warehouse of 300,000 sq ft from the same seller for Rs 70 crore. In June, Ascendas India Trust undertook forward purchase of 1.8 million sq ft BlueRidge IT SEZ III in Pune. It had also undertaken a forward purchase of BlueRIdge II earlier in the same way. Initially and during the construction, Ascendas India’s investment was through debt to repay certain liabilities and construction.

A mail to Ascendas did not elicit any response.  Sources said Proprium Capital, set up by former Morgan Stanley executives, is looking at such deals in Bengaluru wherein it will get into an agreement with the local developer to develop a 1 .5 million sq ft project. It is also exploring similar deals in other places, sources said.

Proprium did not respond to queries on the subject. Though sources said even Morgan Stanley Private Equity has done forward purchase deals, it could not be independently verified. Late last year, Xander Investment Management signed an agreement with Hyderabad developer Phoenix Group for office buildings covering an area of 4.5 million square feet in the financial district at Gachibowli. 

According to sources, the Tata Realty-Actis platform is looking to do some agreements with developers in the country. However, Tata Realty did not repond to Business Standard’s queries.

“Through forward purchase, one can acquire Grade A properties and earn yields closer to development, which are generally higher instead of stabilised yields,” said Ramesh Nair, chief executive at JLL, a property consultant.

Nair said that since the realty market is so varied in terms of its rules, regulations and the development approach, forward purchase helps these entities to primarily shift the risk of land acquisition, approvals and delivery onto to local partners. Rituraj Verma, partner at Nisus Finance Services, said forward purchase is the safest way forward for foreign investors. “It puts the risk of aggregation of land, approvals, taxes, and leasing on the seller,” he said.

However, these kind of deals have their pitfalls. Rajesh Jaggi, managing partner, real estate, Everstone group, said both the parties do not share the risks and alignment is not there.

“Developers buy land, build a property and sell it. Investors have to take the risk of leasing. In between, costs go up which we have to bear,” he said.

Verma said the financial needs of the seller are often not taken care of and bridge capital is needed to finish the commitments to different stakeholders.

The stakeholders include land owners, government departments, and lessees. This (not taking care of the financial needs of the seller) may see many deals not getting completed.  



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