PE inflows in residential realty at 4-year low, commercial at 4-year high: Report

[] Total private equity inflows in India’s residential real estate segment declined by 82% since 2015, at USD 266 million in 2018, while commercial real estate drew the lion’s share with USD 2.8 billion PE funds, says a report by ANAROCK Property Consultants

Institutional investors invested more than USD 4 billion in funds across the country’s real estate segments in 2018, according to ANAROCK Property Consultants’ latest report, ‘Private Equity in Indian Real Estate’. The commercial office segment saw the highest inflows, accounting for a massive 70% share of the total institutional investments into the industry in 2018. Retail real estate came in a distant second with 7% and the residential sector drew the least private equity among the three sectors, with less than 7% of the overall share. The report says that out of the total PE inflow of USD 14 billion into the sector in the last four years, 2017 and 2018 collectively saw the maximum investments, to the tune of USD 8.6 billion.

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Commenting on the report, Shobhit Agarwal, MD and CEO, ANAROCK Capital said: “Currently, funding is a major hurdle for the Indian real estate’s growth prospects, especially after the NBFC crisis. Private equity funding is the best alternative for developers who qualify for it. Despite a decline of 9% in PE inflows in 2018 against the preceding year, 2019 will bring a marked increase in private equity funding because of India’s first REIT listing. From this point onward, commercial real estate, especially Grade A office spaces, will attract considerable investments. Nevertheless, much of the industry’s prospects also hinge on the outcome of the upcoming general elections. Institutional investors will continue to pump in funds into the real estate industry, if they can rely on political stability, proactive policies and a favourable microeconomic environment.”

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GST rationalisation and the growth of e-commerce, have driven the demand for large-scale warehouses in various locations. With India’s logistics industry being accorded infrastructure status in late 2017, the sector witnessed a four-fold increase in investments. Alternate asset classes namely student housing and senior citizen living, barely mentioned or considered in previous years, drew meaningful interest not only from the industry but also institutional funds. The report further stated that despite deal numbers declining since 2015, the average deal size has increased by nearly 172% in the last four years – from USD 47 million in 2015 to USD 128 million in 2018. The top five deals in 2018 alone contributed almost 50% of the total investments during the year. PE investors have become more cautious about selecting and associating with developers. However, once confident, they are making larger investments.

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Top 5 PE deals of 2018

Company Investors Amount (USD million) Date City Sector
Shapoorji Pallonji Group Mapletree Investments Pte Ltd           352 November 2018 Chennai Commercial
Phoenix Group Xander           350 October 2018 Hyderabad Commercial
Indiabulls Real Estate Blackstone           730 March 2018 Mumbai Commercial
Equinox Business Park Brookfield           386 January 2018 Mumbai Commercial
Phoenix Group Ascendas           204 July 2018 Hyderabad Commercial

Source: ANAROCK Research

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“A segment-wise breakdown indicates that commercial realty saw an annual increase of 27% in PE investments, from nearly USD 2.2 billion in 2017 to over USD 2.8 billion in 2018. High occupancy levels, relatively lower rentals in dollar terms, quality Grade A assets and high-quality tenants, are the key reasons for the commercial space to draw around 70% of the overall share of the total private equity investments in 2018. Considering high demand, fund exits have been relatively easier in commercial real estate and with REITs being launched, they will become easier,” Agarwal added.

PE investment in Indian real estate in Q1 2019

In less than three months into 2019, we have already seen PE investment touching almost USD 1 billion, the majority of it coming through a single deal, when Brookfield acquired a portfolio of hotel assets of Leela Ventures for USD 570 million, recently. Also, investors’ interest in long-term real estate plays with preferred developers, continues to be visible with more than USD 500 million of additional platforms getting created in just 2.5 months. Moreover, the REIT offering by the Blackstone-Embassy Group can open a new chapter in the country’s real estate space.

Key PE deals in Q1 2019

Investor Investee Asset class Amount (USD million)
Brookfield Hotel Leela Ventures Hotel 573
Hines DLF Office 127
LOGOS India Casagrand Distripark Logistics and warehousing 98

Source: ANAROCK Research

Other report highlights

  • Between 2016 and 2017, the main southern cities cumulatively saw just 18% (in 2016) and 17% (in 2017) of the total PE investments. This share increased to 54% in 2018, through a series of investments.
  • The retail real estate sector is riding high on India’s growing consumerism – not just in metros and tier-1 cities but also in tier-2 and tier-3 cities. Nearly 46% of institutional investments in retail spaces between 2015 and 2018, were made in non-metro cities like Bhubaneshwar, Chandigarh, Indore, Amritsar and Ahmedabad.
  • Due to multiple issues like stalled/delayed projects, the liquidity crunch, high property values and low sales, the residential real estate sector has been shedding PE investors’ interest. Between 2015 and 2018, equity investments into the sector reduced from 47% to a mere 3%.
  • However, the affordable housing segment is gaining momentum and investors will seek to secure a slice of this increasingly lucrative pie.

Best-performing cities for PE investment

  • Mumbai continued to be the most-preferred destination for overall PE investments, seeing nearly 38% of the total capital inflows in 2018.
  • Hyderabad witnessed a sudden burst in investments in 2018, attracting more than USD 1.1 billion of private equity – a three-fold increase in investments compared to the collective previous three-year period. This growth spurt was largely led by commercial real estate, with the Phoenix Group receiving vast PE infusions through multiple deals.
  • Hyderabad surpassed Bengaluru and Chennai, the other two major south Indian cities, in investment inflows.

PE in Indian realty: Outlook for 2019

  • Commercial realty attracted considerable private equity investments in 2018 and this trend will continue in 2019. India’s first REIT listings is a sure-fire draw for liquidity infusions into the office segment. In fact, this will prompt commercial property players, to set up more bandwidth and funds into the commercial sector.
  • Reduction in the GST for under-construction projects in both, premium and affordable segments, will trigger demand and thus, increase housing sales. This move will give a major fillip to under-construction properties whose demand was substantially low for many quarters. It will also help developers reduce their massive unsold stock comprising 6.73 lakh units across the top seven cities. Meanwhile, in a bid to capture the substantial market potential of affordable housing, many PE funds and developers will seek to upgrade their participation in it.
  • The NBFC’s cautious approach in lending, presents an opportunity for non-banks and offshore lenders to enter the market. As a result, 2019 will see a spike in investment activity from global investors providing flexible forms of either debt or equity on selected projects. Likewise, PE investors are also expanding their footprint into real estate-structured equity/mezzanine funding.
  • The forthcoming 2019 general elections will definitely play a pivotal role in deciding the future course of action. If there is a change in government, there is a possibility that it may announce new schemes and policies, which may impact the attractiveness of real estate investments or vice-versa. However, only a stable government at the centre can positively impact the Indian real estate market in the future.

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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