Private equity (PE) investment in Indian real estate has seen a huge pick up after stagnating over the past five years. This year, there is a marked improvement in private equity activity in the real estate sector, which is bogged down by huge debt and low demand.
According to a recent report by Knight Frank India, with the new government assuming office in 2014 and the subsequent roll out of a battery of reforms, there has been a paradigm shift in investors’ interest.
From an average investment of $2.1 billion in 2011-14, capital flows rose by 57 per cent to an average of $3.3 billion between January 2015 and mid-September 2017. In 2017 the number of deals dwindled to 13, just over one-fourth of the tally in 2010.
However, the average investment per deal increased 10-folds to $246 million per deal in same period.
As per Knight Frank India, the bulk of the investment in 2016-17 went into pre-leased properties. Investment into development sites saw a sharp drop courtesy the low risk appetite among investors. Now PE investors are avoiding execution risk, approval risk and marketing risk.
The big boost for the sector is the Real Estate (Regulation and Development) Act (Rera) 2016, the Benami Transactions (Prohibition).
These path-breaking reforms attracted private equity investors after almost half-a-decade of near stagnation. The big boost for India’s strong economic fundamentals was evident as more than 70 per cent of the PE capital contributors in 2017 were long-term sovereign and pension funds.
According to Knight Frank India, Gurgaon and Mumbai collectively command 96 per cent of the PE investment pie in the Indian real estate in 2017. A majority of private equity investors in 2017 are domestic investors followed by investors from USA and Canada.
“Investors tread cautiously; investments into development sites dry up, bulk of capital flows veer towards pre-leased properties,” the report said.
Gurgaon attracted 56.4 per cent of total investment in real estate.
The report pointed out that the residential sector has been facing immense challenges in attracting institutional investment over the past few years owing to the lack of transparency, delay in approvals and poor accountability of developers, which has led to indefinite delay in delivery of projects.
The indefinite delay had caused humungous losses to consumers and investors.
“The scenario is likely to change with Rera being implemented across several states and goods and services tax (GST) now implemented. Rera would bring in accountability and transparency, thereby minimising the scope for delay in delivery of projects. With GST, everyone involved in the supply chain of real estate development, from material suppliers to contractors to developers, would have to shift to an organised model,” the Knight Frank India report said.
“These reforms would streamline the construction sector ensuring only reputed developers with a good track record of delivery combined with sound financials remain in the market. In addition to this, the government’s thrust on affordable housing by providing infrastructure status to affordable housing projects, interest subsidy scheme under Pradhan Mantri Awas Yojna (PMAY) coupled with now functional Rera and GST would make the residential sector appealing to investors and buyers alike,” it further said.
With the change in regulatory environment minimising the risk associated with development projects, it would only be a matter of time before investors start flocking to this sector again. The report also envisions tremendous potential in the residential sector to attract funds in the affordable housing projects.
There has been two major fund raising planned in the affordable housing segment by domestic companies – Kotak Realty Fund looking to raise $100 million and Brick Eagle planning to raise $110 million to invest in projects in the affordable housing segment.
“In the Rera-era now, the need for private equity financing would accentuate, considering that developers can no longer rely on customer advances for funding pre-launch stage of projects (land acquisition and regulatory approvals). Further, utilisation of customer payments linked to construction progress would translate into stretched working capital requirement for projects with low sales velocity. This shall also supplement the need for such funding,” the report said.
Office and retail assets are not just being absorbed by global investors, even domestic investors are joining the bandwagon. According to recent reports and fund raising plan announcements, domestic institutional investors are raising money to invest into pre-leased commercial assets in India.
Some of the recent announcements include:
ICICI Prudential AMC, Indiabulls Asset Management, Milestone Capital advisors in talks to raise Rs 1000 crore each to invest into pre-leased commercial assets.
Large land parcel of Dhirubhai Ambani Knowledge Centre (DAKC) in Navi Mumbai (133 acres) has attracted very strong interest from institutional investors and developers alike for mixed development projects. Some of the renowned names include Brookfield, Blackstone, Hiranandani, RMZ and Ascendas.
Blackstone is in talks to acquire the First International Financial Centre (FIFC) Tower in Mumbai’s business district Bandra-Kurla Complex for $ 135 million.
n Phoneix mills is buying back stake worth $ 215 million from its early equity investors. Going forward, pick up in management buying back stakes from early investors would lead to increase in churning of investors’ and provide confidence about exit opportunities. This would lead to greater confidence while investing in this sector.
Global sovereign and pension funds are not just settling for office and retail assets in India, but are also scouting for warehousing opportunities in India.
The government has planned dedicated freight corridors, industrial corridors, manufacturing corridors, multi-modal logistics hubs and intends to invest over $ 30 billion in developing them. In addition, with the biggest tax reform goods and services tax (GST) now implemented, the logistics industry of India would undergo unprecedented transformation and we would see more institutional investments coming into the warehousing space, the Knight Frank report said.
Some of the recent announcements include:
Ascendas-Singbridge JV plans to invest $ 500 million for developing warehouses in India.
Warburg Pincus-backed ESR is planning to invest $ 100 million annually to develop organic warehousing assets.
Big-ticket investment on the cards for affordable housing projects with already about $130 million in the pipeline to milk the government-backed initiative.