Will private equity investments in Indian realty increase or decrease?

[] With several policy changes announced by the government over the last few months, we look at private equity investors’ outlook towards the Indian real estate sector and how this will affect developers and projects

The actions of private equity (PE) investors, can serve as a good indicator of the sentiments in the real estate market. In the last few months, the government has announced several major initiatives that are likely to alter the future course of business for the stakeholders, in realty market.

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Firstly, the definition of affordable housing has been changed, to 30 square metres carpet area for apartments within the municipal limits of the four metros and 60 square metres of carpet area for locations outside the four metros, from the earlier definition based on built-up area, points out Rohit Poddar, MD, Poddar Housing & Development Ltd. “Moreover, the income tax holiday has been extended from three years to five years, subject to MAT. This means that the effective rate of taxation is 22.99% instead of 33.99%, thereby, leading to 11% savings in taxes. This would imply a better IRR for monies invested by PE investors,” Poddar explains.

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Government’s push for affordable housing, to attract PE investors

Experts believe that the affordable housing segment could emerge as a preferred choice for PE investors, owing to the huge demand-supply gap, along with the tax incentives, interest subsidy on home loans and fast-track regulatory approval process that are proposed to be put in place. Anshuman Magazine, chairman, India and South East Asia, CBRE says, “One of the key announcements in the Union Budget 2017-18, was the government’s decision to grant infrastructure status to the affordable housing sector. This move will help developers to access low-cost credit for longer tenures for these projects. Recently announced tax sops for the realty sector, are also likely to encourage investments. The demonetisation drive, along with various other policy initiatives, will bring in more transparency into the sector and boost both, consumer and investor confidence in the long term.”

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PE investment in opportunities in Indian real estate

According to a report, ‘FY18 Outlook: Real Estate Sector’, by India Ratings and Research, “The real estate sector has largely relied on refinancing, to meet its debt servicing obligations, given the negative cash flows. The sector has seen significant interest from non-banking finance companies and private equity investors for refinancing debt. Such refinancing provides a cushion for developers to hold prices despite slow sales.”

With affordable housing getting infrastructure status and end-users getting access to cheaper funds, private equity investors may find the segment to be very lucrative. The government’s focus on ‘Housing for All’ also creates opportunities for investors, as the sector will need far greater funds than what is currently available to developers. Prospects for investment will also increase, with the Goods and Services Tax (GST) being rolled. The implementation of the Real Estate Regulation Act (RERA) will also improve project deliveries. Consequently, the demand for affordable housing, is expected to remain strong in the coming years and PE investors will look for projects that show good prospects.

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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