PE Out­shines Banks In Fund­ing Realty

While banks are re­duc­ing their ex­po­sure to real es­tate due to ris­ing NPAS, the NBFCS and PE funds in­vest­ment in real es­tate are steadily in­creas­ing due to var­i­ous pol­icy re­forms & reg­u­lar­iza­tions.

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The banks fac­ing losses, lower profit mar­gins and in­crease in non­per­form­ing as­sets (NPAS) are re­luc­tant to fund realty projects. Re­plac­ing them are the non-bank­ing fi­nan­cial com­pa­nies (NBFCS) and Pri­vate Eq­uity (PE) play­ers who are cur­rently pro­vid­ing the largest chunk of credit in­flow of the realty busi­ness. The rise in in­sti­tu­tional in­vest­ment has been dom­i­nated by for­eign funds ac­count­ing for 60% of in­vest­ments in res­i­den­tial, of­fice and in­dus­trial as­sets. Some prom­i­nent global in­vestors sign­ing big ticket deals in­clude GIC Pte Ltd, Canada Pen­sion Plan In­vest­ment Board (CPPIB), Black­stone and the Xan­der Group. FDI into con­struc­tion devel­op­ment sec­tor too is im­prov­ing with the to­tal FDI of $257 mil­lion in H1 2017, more than dou­ble the to­tal FDI in 2016. Real es­tate de­vel­op­ers find the con­ve­nient and has­sle-free transactions com­pared to banks, as the big­gest at­trac­tion for them to ap­proach PES and NBFCS for fund­ing, though they charge a higher in­ter­est rates. The in­vestors at their end, have de­fin­i­tive pa­ram­e­ters and dis­tinc­tions, for se­lec­tion of de­vel­op­ers to whom they would pro­vide fund­ing, but they are eas­ing up and are tak­ing risks to strike eq­uity deals. No won­der, com­pa­nies like Pi­ra­mal Fi­nance, Ba­jaj Fi­nance, LIC Hous­ing Fi­nance, Gold­man Sachs and oth­ers are steadily in­creas­ing their deal books. “Banks in­ter­est rates are in the range of 12-15 per cent for real es­tate sec­tor, the for­eign in­vestors are read­ily of­fer­ing 8 - 9 per­cent. I fore­see the in­flux of PE in­vest­ments in real es­tate in near fu­ture, this will make banks also to relook their strat­egy to­wards realty sec­tor,” stated Aditya Ke­dia, Man­ag­ing Direc­tor - Transcon De­vel­op­ers.

res­i­den­tial in­vest­ments

The gov­ern­ments push for af­ford­able hous­ing, boosted the PE in­flows in the FY 2018 in the res­i­den­tial seg­ment in­creas­ing by 15 per cent, ac­cord­ing to prop­erty con­sul­tant - Cushman & Wake­field. An­other boost came in the form of the large plat­form trans­ac­tion be­tween Hous­ing Devel­op­ment Fi­nan­cial Cor­po­ra­tion (HDFC) and Abu Dhabi In­vest­ment Author­ity (ADIA) more than dou­bling the PE in­vest­ment in res­i­den­tial sec­tor. Mum­bai ac­counted for around 19% of the to­tal deals in the res­i­den­tial sec­tor. The ex­perts con­sider the strong end-user de­mand and govern­ment in­cen­tives for both de­vel­op­ers and home­buy­ers in the af­ford­able hous­ing projects will in­crease the trac­tion for in­sti­tu­tional in­vestors, in the com­ing years. The at­trac­tion of res­i­den­tial sec­tor re­mains strong as the exit route is clear for this as­set class.

of­fice in­vest­ments

While, the res­i­den­tial sec­tor is un­der pres­sure of fewer sales and new launches, the com­mer­cial real es­tate across cities has been sta­ble and is main­tain­ing its ro­bust an­nual trans­ac­tion vol­umes. As per of­fi­cial records, the of­fice seg­ment saw a de­cline in PE in­vest­ment at Rs 6,100 crores from Rs 10,160 crores but, the in­dus­try in­sid­ers at­tribute the de­cline to the post­pone­ment of clo­sure of large ticket brown field transactions. Over­all, the of­fice real es­tate driven by M&A deals and cor­po­rate fund­ing has led the de­vel­op­ers to in­crease their com­mer­cial spa­ces projects. The seg­ment saw a spat of transactions in this cat­e­gory with strong mo­men­tum in leas­ing, The sta­ble re­turns on in­vest­ments, as well as the po­ten­tial to list in­comeyield­ing as­sets un­der REITS, have steered mul­ti­ple in­vestors to­wards of­fice as­sets.

re­tail in­vest­ments

The de­mand cou­pled with acute short­age of qual­ity re­tail spa­ces and in­creas­ing rental val­ues have at­tracted PE play­ers to­wards the re­tail seg­ment in the last two years. Black­stone’s pur­chase of L&T Realty’s Sea­wood Mall and GIC’S in­vest­ment in Sheth De­vel­oper’s Vi­viana Mall, are some of the large deals dur­ing the year. More­over, de­mand for re­tail space has re­mained steady, as many

Cau­tioned by the re­cent bank frauds, the bank­ing sec­tor is guarded in its lend­ing to the realty in­dus­try, on the other hand the PES and NBFCS em­bold­ened by the sev­eral re­forms and pol­icy ini­tia­tives, prom­i­nent be­ing the RERA, GST, re­lax­ation in FDI norm and amend­ments to Real Es­tate In­vest­ment Trusts (REITS) are mak­ing in­roads into the sec­tor. And the trend is only set to in­crease go­ing for­ward. The PE in­vest­ments into res­i­den­tial as­set be­tween FY15 and FY18 were pri­mar­ily in the form of struc­tured debt, cour­tesy the in­her­ent risk of the sec­tor. The for­eign in­vestors, mainly pure eq­uity funds are build­ing port­fo­lio of rent-yield­ing as­sets in the of­fice sec­tor in In­dia. This has led to own­er­ship shift be­tween the de­vel­op­ers and the in­vestors.

new global brands are for­ay­ing in In­dian mar­ket and the ex­ist­ing ones are ex­pand­ing their foot­prints in the coun­try. In the sec­ond half of 2017, about 2 mil­lion square feet of re­tail real es­tate sup­ply en­tered the cities of Kolkata, Delhi NCR, Chen­nai, Pune and Ben­galuru, com­ple­mented by the steady in­flow of cap­i­tals mainly via PE chan­nels. PE in­vest­ment in re­tail realty rose by 15% last year and will con­tinue to be on the up­ward curve. Ac­cord­ing to Bain & Com­pany, the top pri­or­ity for funds in 2018 will be mak­ing new deals though the in­vestors feel that the cur­rent val­u­a­tions are high.

Ware­hous­ing in­vest­ments

The emer­gence of or­gan­ised re­tail and man­u­fac­tur­ing in the coun­try and im­ple­men­ta­tion of GST, has pro­pelled the ware­hous­ing sec­tor. The size of the In­dian ware­hous­ing in­dus­try (across com­modi­ties and modes) is pegged at about INR 560 bil­lion with an an­nual growth rate of over 10% by EY re­search. The de­vel­op­ers in this seg­ment have part­nered with PE funds to set up a lo­gis­tics and ware­hous­ing plat­form such as CPPIB $500 mil­lion com­mit­ment to Indo Space Core - a joint ven­ture with Ever­stone Group and LO­GOS Group and As­setz Prop­erty Group mu­tual in­vest­ment of around $400 mil­lion in ware­hous­ing setup. Of the to­tal pri­vate eq­uity (PE) in­vest­ments last year, by the global and do­mes­tic in­sti­tu­tional in­vestors in the In­dian real es­tate, about 10% has been in the sec­tor of in­dus­trial and ware­hous­ing, showed a JLL In­dia study. “De­vel­op­ers and sev­eral for­eign pri­vate eq­uity play­ers, now show­ing high in­ter­est in ware­hous­ing de­vel­op­ments across In­dian cities are likely to in­vest around $3-4 bil­lion in key mar­kets. Pe­riph­eral lo­ca­tions of tier 1 and tier 2 cities and im­prov­ing con­nec­tiv­ity through in­fra­struc­ture de­vel­op­ments, will make the sec­tor more pre­pared for the fu­ture,” said, Me­hul Shah, CEO, LO­GOS In­dia.

the OUT­LOOK

Sev­eral de­vel­op­ments in In­dia had pos­i­tive ef­fects on the econ­omy in 2017. The govern­ment’s fis­cal deficit, which was 4.5% of the gross do­mes­tic prod­uct (GDP) in 2013 to 2014, steadily de­clined to 3.5% in 2016 to 2017 and is ex­pected to fur­ther de­crease to 3.2% of the GDP in 2017 to 2018, ac­cord­ing to the RBI. The con­sumer spend­ing and in­fra­struc­ture out­lay in­creased in 2017 and ser­vice & man­u­fac­tur­ing sec­tor showed the high­est growth. How­ever, fi­nan­cial ser­vices, real es­tate and con­struc­tion posted marginally lower growth in 2017 com­pared with the pre­vi­ous five fis­cal years. Amid tepid sales en­vi­ron­ment in the res­i­den­tial seg­ment, de­vel­op­ers are diver­si­fy­ing their port­fo­lios in other realty seg­ments and PE has given an al­ter­na­tive and at­trac­tive route for fund­ing. The PE play­ers are also seen to look at dis­tressed as­sets owed to the changes in the in­sol­vency code and an in­creas­ing num­ber of de­vel­op­ers ap­proach­ing the mar­ket for re­struc­tur­ing. The ad­vent of in­sti­tu­tional cap­i­tal will push the trans­parency and best prac­tices in the real es­tate to en­hance the de­liv­ery ca­pa­bil­i­ties. The strong in­flow of in­sti­tu­tional fund­ing cor­rob­o­rates In­dia’s growth story and most im­por­tantly the pull of the In­dian real es­tate for global and In­dian in­vestor alike. Af­ford­able hous­ing and lo­gis­tics & ware­hous­ing are the sun­shine sec­tors, gar­ner­ing con­tin­u­ous in­ter­est from PE funds. The in­flows are ex­pected to rise over the next few years marked by some mar­quee deals in the of­fice sec­tor by pri­vate eq­uity ma­jors (in­clud­ing pen­sion and sov­er­eign funds, sug­gest ex­perts).

Re­tail as­sets present a po­ten­tial of high rental growth, as they have a rev­enue shar­ing clause in their rents apart from the stan­dard ap­pre­ci­a­tion clause for base rents. In­ter­est­ingly, it is the green­field projects or new de­vel­op­ments in ware­hous­ing seg­ment that have been at­tract­ing more than two third of these in­vest­ments and rest have been for ac­qui­si­tion of ready projects.

aditya Ke­dia

Source: Grant Thornton

me­hul shah

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