PE investments in Indian realty sector go up to 26 per cent

Chennai:  Despite unfavaourable investment scenes, private equity (PE) investments in India’s real estate sector has gone up to 26 per cent recording Rs 4,716 crores during the first three quarters of this fiscal compared to Rs 3750 crore received in the corresponding period last year. 

According to global real estate consultancy firm Cushman & Wakefield’s latest report on private equity (PE) investments in real estate, the healthy increase was primarily due to a rise in investments in ‘leased income generating’ office properties by institutional investors. 

The report also noted that slow pace of growth in the real estate sector with net absorption in offices down by 15% and vacancies increasing, subdued residential sales, slower GDP growth, inflationary pressure and volatility in Forex and stock markets did not alter the faith reposed by the investors on real estate market.

Apart from offshore funds, domestic capital allocated for income generating office properties is also being raised and deployed, the report said.  Terming the announcement of draft REIT regulations proposed by SEBI, as positive development, the report said, this would create a secondary market for office properties and ensure greater retail participation in an organised institutional format. It will also positively impact institutional investments in development of non-residential projects – which has been minimal for the last few years – primarily due to exit concerns. Even listed companies and most professionally managed real estate companies are currently plagued by high levels of debt and liquidity issues; the BSE’s Realty Index is low. 

Commenting on the report, Sanjay Dutt, Executive Managing Director South Asia, Cushman & Wakefield said, “Despite a slowdown in the local real estate market, funds remain committed to India as a top investment destination with overall private equity investment only expected to increase especially in income yielding assets. Both domestic and foreign funds with a proven track record have become increasingly successful in raising capital. With improving sentiments, deal momentum in the real estate sector is expected to increase in the coming year. Further, the move by SEBI to begin its consultation process for bringing in REITs has brought in a slight sense of optimism in the industry as developers and even funds will be able to offload some of their assets and raise much needed funds/ get much awaited exits and the sector develops funding practices currently being followed in more mature economies.”

Approximately 65% of the overall investment during the year was witnessed during third quarter at Rs 3,078 crores. The total value of investments in the office segment for the first three quarters of 2013 was recorded at INR 2,476 crores, which is more than double that of the same period in 2011 and 2012. 

Investor interest in the leased office buildings has been increasing over the past few years with the sector contribution 53% of the overall investments in 2013 compared to 36% and 30% in 2012 and 2011 respectively. There is a clear preference for investments in leased office spaces with over Rs 7,667 crores invested in the segment since 2011. 

The total value of investments in the residential segment for the first three quarters of 2013 was recorded at Rs 2,240 crores, a drop of 11% compared to the same period last year. The residential sector due to its sheer size has been a major contributor to overall investment activity but has not witnessed any substantial growth over the last three years. 

However, in the residential segment though launches for the first three quarters of 2013 are 5% higher than the same period last year, residential unit sales have been somewhat subdued. Given the large demand-supply gap that exists in India’s housing sector funds are still keen on exploring any attractive investment opportunities.  

Residential asset class is a preferred investment, though more advanced projects with approvals and initial sales are preferred over land acquisition deals. Most of the deals are structured equity or structured debt deals, with a preference or guarantee of minimum return and capital.

Other asset classes such as retail and hospitality are witnessing weak investor interests as both are currently plagued by high inventories and sluggish demand. 

The total number of deals in the first three quarters of 2013 declined to 21 down from 27 during the same period in 2012 indicating an increase in average deal size by nearly 62% to INR 225 crores (USD 36 million).  

 Bengaluru witnessed the highest level of announced investment value in 2013 at RS 1,979 crores (USD 317 million), an increase of 79% compared to the same period last year. This was due to a commitment by a sovereign fund into a platform focused on leased office assets. Pune also witnessed an increase in transaction volume in 2013 by over three times compared to 2012 with investments of Rs 780 crores (USD 124.9 million). Transaction volume in NCR increased 20% in 2013 to INR 612 crores (USD 98 million), all of which was in the residential asset class. 

Mumbai, which traditionally attracted the maximum investments in the country, was the only city to witness a decline of 43% in the total volume of deals to Rs 720 crores (USD 115.3 million) for the first three quarters of 2013. However, investment activity in the city is expected to increase with a few large deals entailing an investment of Rs 2,000 crore in office assets currently in the pipeline.