‘ Real es­tate- mak­ing In­dia; Adapt­ing In­dian real es­tate to evolv­ing av­enues’: EY-FICCI

Accommodation Times - - Front Page - By AT News Ser­vice

Re­al­iz­ing the im­por­tance of ci­ties to the eco­nomic per­for­mance of the coun­try, ur­ban de­vel­op­ment and hous­ing form a key part of our new Gov­ern­ment’s vi­sion of a dig­i­tally evolved coun­try. The re­port elab­o­rates on the role played by real es­tate in In­dia to achieve the goals set by the Gov­ern­ment — be it es­tab­lish­ment of smart ci­ties or achiev­ing hous­ing for all. It also il­lus­trates how our mega ci­ties have been re­spond­ing to the om­nipresent de­mand for hous­ing across in­come seg­ments through ex­tended de­vel­op­ment beyond their mu­nic­i­pal bound­aries. In ad­di­tion, the re­port pro­vides pro­files of des­ti­na­tions that cater to this de­mand as well as of emerg­ing trends in th­ese. Be­ing cap­i­tal- in­ten­sive, fund­ing has emerged as one of the great­est chal­lenges fac­ing the real es­tate sec­tor in re­cent times. The global eco­nomic cri­sis con­sid­er­ably re­duced fund­ing op­tions avail­able to de­vel­op­ers, who have been look­ing for al­ter­na­tive sources of fund­ing­due to re­duced de­ploy­ment of gross bank credit to com­mer­cial real es­tate and hous­ing from 10% in FY10 to 8.3% in FY14. Pol­icy re­forms and a macro-gov­ern­ment vi­sion mark the start of a new era. In this re­port, we out­line the role of real es­tate in the evo­lu­tion of a new In­dia.

Rand­hir Kochhar, Part­ner, EY, says:

“High of­fice space yields, cou­pled with an ever-in­creas­ing vis­i­bil­ity on In­dian REITs, have led to in­vestors build­ing size­able port­fo­lios of high-qual­ity rentable com­mer­cial spa­ces. This has led to PFs/ SWFs part­ner­ing with de­vel­op­ers, op­er­a­tors and man­agers to cre­ate/ac­quire such as­sets. Di­rect in­vest­ment in the In­dian Real Es­tate in­dus­try has evolved due to in­creased al­lo­ca­tions to real es­tate as an as­set class by SWFs and PFs on ac­count of in­creas­ing real es­tate and sov­er­eign debt yields.”

Ap­proval of REIT: In Septem­ber 2014, the fi­nal guide­lines for REIT were no­ti­fied by the Se­cu­ri­ties and Ex­change Board of In­dia (SEBI). The guide­lines re­quire the Fi­nance Min­is­ter’s ap­proval for tax con­ces­sions to make REIT at­trac­tive and at par with sim­i­lar norms in the rest of the world. Sev­eral de­vel­op­ers are wait­ing on the side­lines to list their com­mer­cial space stock. Ac­cord­ing to in­dus­try es­ti­mates, In­dia has 200 mil­lion square feet “REIT-ready” space. REIT will pro­vide an al­ter­na­tive route of fi­nance. REIT is cur­rently open for of­fice space, but de­vel­op­ers of malls are an­tic­i­pat­ing ex­tend­ing of REITs to shop­ping cen­ters, which will boost de­vel­op­ment of malls in the coun­try. Fur­ther­more, re­lax­ation of FDI norms may en­cour­age for­eign sin­gle- and multi-brand re­tail­ers to set up shop in In­dia and cre­ate a sig­nif­i­cant de­mand for re­tail space.

FDI in real es­tate: FDI in­flows in con­struc­tion (town­ships, hous­ing and con­struc­tion de­vel­op­ment) have been de­clin­ing since FY12 due to In­dia’s weak econ­omy and reg­u­la­tory con­cerns. FDI in con­struc­tion de­vel­op­ment has de­clined to US$1,226 mil­lion in FY14 from US$1,332 mil­lion in FY12. The Union Cab­i­net has ap­proved the pro­posal of the Depart­ment of In­dus­trial Pol­icy and Pro­mo­tion to re­lax ex­ist­ing per­for­mance-linked con­di­tions re­lat­ing to FDI. Th­ese in­clude the fol­low­ing: ► Built-up area to be re­duced from the ex­ist­ing 50,000 sq., m. to 20,000 sq. m. ► Min­i­mum cap­i­tal­iza­tion re­duced from US$10 mil­lion to US$5 mil­lion, with a three-year post- com­ple­tion lock-in pe­riod ► Projects with a com­mit­ment of at least 30% of the to­tal cost to­ward low-cost af­ford­able hous­ing ex­empted from re­quire­ments re­lat­ing to min­i­mum built-up area and cap­i­tal­iza­tion, with a three-year lock-in pe­riod The po­ten­tial of and the chal­lenges faced in in­vest­ing in real es­tate as well as the in­vest­ment phi­los­o­phy of avail­able pools of cap­i­tal have led to the evo­lu­tion of this new form of in­vest­ment in real es­tate in the coun­try.

Mar­ket op­por­tu­nity — the need gap

The global fi­nan­cial down­turn in 2008 re­sulted in a sig­nif­i­cant shift in the fund­ing sce­nario with in­vestors be­com­ing in­creas­ingly cau­tious. Along with a de­cline in the to­tal quantum of in­vest­ment, the av­er­age ticket size of deals in real es­tate trick­led down from US$140 mil­lion in 2008 to US$30–US$40 mil­lion after the fi­nan­cial down­turn. Another no­table trend was that in­vest­ments be­came skewed to­wards the project level rather than the en­tity level. De­vel­op­ers have been look­ing for other sources of fund­ing due to the de­cline in gross bank credit de­ploy­ment to the com­mer­cial real es­tate and hous­ing sec­tor from 10% in FY10 to 8.3% in FY14. How­ever, with learn­ing de­rived from the global melt­down and past in­vest­ments in In­dia, in­vestors have be­gun look­ing at more se­cure fund­ing op­tions such as mez­za­nine and struc­tured eq­uity in­stru­ments. Non-Bank­ing Fi­nance Com­pa­nies (NBFCs) have been ac­tively look­ing at “last mile fund­ing” op­por­tu­ni­ties, where projects in which sub­stan­tial in­vest­ment have been made are de­layed due to tempo- rary mis­matches in cash flows. There­fore, there is a large need (cre­ated over time) for eq­uity fund­ing from in­sti­tu­tional sources. It is this gap that is be­ing filled by plat­form-level deals be­tween PFs/ SWFs and de­vel­op­ers.

In­vest­ment flows

Since April 2012, there have been seven such large plat­form-level deals by Prov­i­dent Funds (PF)/Sov­er­eign wealth funds (WFs) that we have tracked. To­tal in­vest­ment in th­ese deals amounts to US$1.9 bil­lion with an av­er­age deal size of US$270 mil­lion. The trend has in­creased in the last year (since July 2013) when the num­ber and size of th­ese deals in­creased sig­nif­i­cantly. In terms of as­set classes, while 74% of this in­vest­ment is for of­fice space as­sets, 20% is in the res­i­den­tial seg­ment and 6% in the hos­pi­tal­ity seg­ment. In terms of the num­ber of trans­ac­tions, the share of of­fice space is 57%, res­i­den­tial 29% and hos­pi­tal­ity 14%. Dur­ing the pe­riod April 2012 to Septem­ber 2014, in­vest­ment in such deals amounted to.US$3.9 bil­lion vis-à-vis in­vested cap­i­tal from pri­vate eq­uity deals worth US$2.7 bil­lion. Although cap­i­tal

Rand­hir Kochhar, Part­ner, EY, says: “High of­fice space yields, cou­pled with an ever-in­creas­ing vis­i­bil­ity on In­dian REITs, have led to in­vestors build­ing size­able port­fo­lios of high-qual­ity rentable com­mer­cial spa­ces. This has led to PFs/ SWFs part­ner­ing with de­vel­op­ers, op­er­a­tors and man­agers to cre­ate/ac­quire such as­sets. Di­rect in­vest­ment in the In­dian Real Es­tate in­dus­try has evolved due to in­creased al­lo­ca­tions to real es­tate as an as­set class by SWFs and PFs on

ac­count of in­creas­ing real es­tate and sov­er­eign debt yields.”

from plat­form-level deals will be in­vested over a longer pe­riod in port­fo­lios of projects, the in­creas­ing num­ber of such deals as well as the higher quantum of cap­i­tal com­mit­ment in­di­cates the con­fi­dence of global funds in the In­dian real es­tate sec­tor. In­creas­ing in­vest­ment flows from Sov­er­eign Wealth Funds (SWFs)/ Prov­i­dent fund (PFs) in­di­cate their con­fi­dence in the po­ten­tial of the In­dian real es­tate sec­tor. The na­ture of this pool of cap­i­tal as well as the form of in­vest­ments — di­rectly in plat­form level deals — over­comes some of the chal­lenges faced by for­eign in­vestors in the past. Given the na­ture of the sec­tor, long-term cap­i­tal has a bet­ter chance of gen­er­at­ing ex­pected re­turns, and there­fore, this form of pa­tient cap­i­tal can ad­dress the needs of de­vel­op­ers and in­vestors by of­fer­ing them en­hanced flex­i­bil­ity to tide over mar­ket cy­cles and project ges­ta­tion pe­ri­ods. Gau­rav adds, “Re­duc­tion in the de­vel­op­ment size of projects for which FDI can be tapped will also open up ad­di­tional op­por­tu­ni­ties with shorter project de­vel­op­ment time frames.” There has been an up­ward re­vi­sion in growth forecasts with the for­ma­tion of a new Gov­ern­ment with a clear majority at the Cen­tre. Some pol­icy changes with re­spect to real es­tate have al­ready been ini­ti­ated (e.g., re­lat­ing to project size and min­i­mum cap­i­tal­iza­tion for FDI, REIT-re­lated reg­u­la­tions, fi­nance for af­ford­able hous­ing, etc.). Th­ese, along with the ex­pected im­prove­ment in the macroe­co­nomic en­vi­ron­ment, can give fur­ther mo­men­tum to in­vest­ment flows from SWFs and PFs as well as to plat­form-level deals in In­dia.

REIT— the new in­vest­ment ve­hi­cle in In­dian real es­tate mar­ket

The in­tro­duc­tion of REITs in In­dia marks the com­ing of age of the coun­try’s real es­tate sec­tor and rec­og­nizes the fact that there is ad­e­quate stock of real es­tate as­sets that are REIT-able in the coun­try. Ide­ally, REITs should of­fer a struc­tured and per­pet­ual source of cap­i­tal and exit op­por­tu­ni­ties for de­vel­op­ers and fi­nan­cial in­vestors, al­low­ing them to un­lock cap­i­tal em­ployed in com­pleted real es­tate as­sets by in­clud­ing such as­sets in the REIT struc­ture. In­tro­duc­tion of REITs that are pure eq­uity cap­i­tal will help to im­prove the debt-eq­uity bal­ance in the real es­tate mar­ket by pro­vid­ing eq­uity fi­nanc­ing and thereby fa­cil­i­tate the growth of a sta­ble and ma­ture real es­tate mar­ket. It is also ex­pected that REITs will help in stream­lin­ing the real es­tate sec­tor by cre­at­ing a trans­par­ent mech­a­nism for rais­ing fi­nance in the mar­ket. For REITs to be­come a re­al­ity in In­dia there are cer­tain key is­sues that need to be re­solved first. • In­dian pen­sion funds and in­surance com­pa­nies should be per­mit­ted to invest in such se­cu­ri­ties while per­mit­ting FDI in REITs up to 100% un­der the au­to­matic route. • In­dian spon­sors of real es­tate will ei­ther be real es­tate own­ers or de­vel­op­ers. How­ever, SEBI’s reg­u­la­tions re­quire spon­sors to have a “real es­tate ex­pe­ri­ence” of five years, which makes it im­pos­si­ble for cor­po­rate real es­tate own­ers sell and lease­back their real es­tate as­sets to REITs spon­sored by them. A spe­cial dis­pen­sa­tion should be made in relation to “sale and lease­back trans­ac­tions” to open up av­enues for busi­nesses in the ser­vice and man­u­fac­tur­ing sec­tors and en­able them to raise eq­uity cap­i­tal by mon­e­tiz­ing their non-core (but valu­able) as­sets, e.g., fac­tory premises, ware­houses, cor­po­rate of­fices, etc. • Cur­rently, the pro­posed tax treat­ment of REITs dif­fer­en­ti­ates be­tween a res­i­dent unit holder and a non-res­i­dent unit holder in relation to their in­come from in­ter­est through a re­duced rate of tax (5%) for non-res­i­dents. This dis­crim­i­na­tion makes the struc­ture un­vi­able, since a spon­sor, be­ing a res­i­dent, does not ben­e­fit from the ef­fec­tive tax im­pact. More­over, this will in­flu­ence the cap­i­tal­iza­tion struc­ture of the REIT and its SPVs. To ad­dress this, it is im­per­a­tive for the Gov­ern­ment to ex­empt Div­i­dend Dis­tri-

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.