Fore­cast for realty in­vest­ments: Cloudy with hints of sun­shine

PE in­vest­ments in realty in the Q1 2018 looked pos­i­tive with over­all PE fund­ing in­creas­ing by 15­17% since a year ago

Hindustan Times (Chandigarh) - Estates - - FRONT PAGE - Anuj Puri let­ters@hin­dus­tan­ The au­thor is Chair­man – ANAROCK Prop­erty Con­sul­tants

The an­cient Chi­nese curse ‘may you live in in­ter­est­ing times’ cer­tainly has a lot of per­ti­nence to In­dian real es­tate to­day. These are doubtlessly ‘in­ter­est­ing’ times for the sec­tor, which has trans­formed sig­nif­i­cantly over the last decade.

A new reg­u­la­tory en­vi­ron­ment is be­ing cre­ated with the im­ple­men­ta­tion of sev­eral dis­rup­tive poli­cies. The Real Es­tate (Reg­u­la­tion and De­vel­op­ment) Act,2016 (RERA), Goods-and-Ser­vices Tax (GST), Real Es­tate In­vest­ment Trusts (REITs), the Be­nami Trans­ac­tions (Pro­hi­bi­tion) Amend­ment Act, 2016 and the Prad­han Mantri Awas Yo­jana (PMAY), among oth­ers, have all hap­pened over the last four years.

These poli­cies are bring­ing in higher lev­els of trans­parency and ac­count­abil­ity, fi­nan­cial dis­ci­pline, fo­cus and ef­fi­ciency into the in­dus­try which could only be dreamed of in the past.

The mar­ket size of In­dian real es­tate sec­tor is ex­pected to touch US$ 180 bil­lion by 2020 and is poised to grow at the rate of 30% over the next decade. Ac­cord­ing to the In­dian Brand Equity Foun­da­tion (IBEF), the num­ber of In­di­ans liv­ing in ur­ban ar­eas is slated to in­crease from 434 mil­lion in 2015 to 600 mil­lion by 2031. The hous­ing sec­tor alone is ex­pected to con­trib­ute around 11% to In­dia’s GDP by 2020.


The in­creas­ing share of real es­tate in the coun­try’s GDP will be sup­ported by in­creased in­dus­trial ac­tiv­i­ties, im­prov­ing in­come lev­els and rapid ur­ban­iza­tion across cities. In terms of FDI equity in­flows, real es­tate is the fourth-largest sec­tor in the coun­try. The to­tal FDI in­flows in the sec­tor were US$ 24.67 bil­lion from April 2000 to De­cem­ber 2017 – which is 7% of the to­tal FDI equity com­ing into the coun­try dur­ing this pe­riod.

As for PE in­vest­ments in In­dian real es­tate, the first quar­ter num­bers of 2018 looked pos­i­tive with the over­all PE fund­ing in­creas­ing by 15-17% since a year ago. How­ever, the steady fall in ap­pre­ci­a­tion and per­sis­tent gloom in the res­i­den­tial prop­erty mar­ket caused PE in­vestors to shift their fo­cus to­wards other as­set classes.

The sec­tor which is see­ing most in­sti­tu­tional in­vest­ments right now is the com­mer­cial of­fice real es­tate. Driven by rapid em­ploy­ment gen­er­a­tion and the near pos­si­bil­ity of the first REIT list­ings, Grade A of­fice projects, IT parks and even lo­gis­tics cen­ters are cur­rently yield­ing the lev­els of re­turns on in­vest­ment that pre­vi­ously made the res­i­den­tial as­set class so at­trac­tive to in­vestors.

Data sug­gests that the av­er­age in­vest­ment per deal, par­tic­u­larly in com­mer­cial real es­tate, has in­creased by al­most 3-4 times to nearly the av­er­age in­vest­ment per deal 6-7 years back. Also, the ap­petite of in­sti­tu­tional in­vestors - in­clud­ing pri­vate equity, sov­er­eign wealth and pen­sion funds - is vis­i­bly in­creas­ing for ma­tured, yield-pro­duc­ing com­mer­cial as­sets with es­tab­lished rentals and oc­cu­piers.

Need­less to say, the rise of in­sti­tu­tional in­vestors in In­dian real es­tate space will sig­nif­i­cantly im­prove lev­els of gov­er­nance in the real es­tate sec­tor and make it far more struc­tured and trans­par­ent.

Ma­jor con­sol­i­da­tion by way of merg­ers, ac­qui­si­tions and JDs has also be­come a prom­i­nent trend in the In­dian real es­tate sec­tor. Some of the top deals in H1 2018 alone are worth over $1.5 bil­lion com­pris­ing of in­vestors like Black­stone, Canada Pen­sion Plan, As­cen­das, GIC and In­di­a­based HDFC ven­ture.

Of­fice real es­tate at­tracted con­sid­er­able pri­vate equity in­vest­ments in 2017 and this trend con­tin­ues in 2018. The prom­ise of In­dia’s first REIT list­ings is a sure-fire draw for liq­uid­ity in­fu­sions into the of­fice real es­tate sec­tor. In fact, this will cause com­mer­cial prop­erty play­ers to de­ploy more band­width and re­sources into the com­mer­cial prop­erty as­set class.

The on­go­ing slug­gish­ness in res­i­den­tial real es­tate con­tin­ues to work against it, with pri­vate equity play­ers wary of the re-in- vest­ment cy­cle risks as­so­ci­ated with it. How­ever, while this means that com­mer­cial real es­tate will elicit the bulk of in­sti­tu­tional in­vest­ment in­ter­est over the mid-term, the Gov­ern­ment is also work­ing hard at mak­ing the res­i­den­tial as­set class more at­trac­tive for large in­vestors.

Over­all, In­dia needs in­vest­ments to the tune of US$ 4 tril­lion over the next 5-6 years to ful­fil the Gov­ern­ment’s var­i­ous schemes. The ‘Hous­ing for All by 2022’ ini­tia­tive alone is likely to bring US$ 1.3 tril­lion in­vest­ments into the res­i­den­tial sec­tor by 2025. In this en­vi­ron­ment, in­sti­tu­tional fi­nanc­ing is gain­ing promi­nence.


The rapid in­crease of non-per­form­ing as­sets (NPAs), sig­nif­i­cantly re­duced profit mar­gins in the real es­tate sec­tor and the RBI iden­ti­fy­ing the real es­tate sec­tor as a ‘high-risk’ busi­ness have made banks leery of too much ex­po­sure to this sec­tor.

Ul­ti­mately, fund­ing sources like pri­vate equity, fi­nan­cial in­sti­tu­tions, pen­sion funds and sov­er­eign wealth funds have to step in and these are now the pre­dom­i­nant fund­ing av­enues for the real es­tate sec­tor. PEs and other in­sti­tu­tions have con­trib­uted nearly 75% of the to­tal fund­ing com­ing into the sec­tor in re­cent times.

How­ever, pri­vate equity play­ers are now con­duct­ing thor­ough due dili­gence and in­vest­ing only in ‘clean’ and vi­able projects by es­tab­lished de­vel­op­ers with strong track records for com­pli­ance and com­ple­tion. Gov­ern­ment in­ter­ven­tions like RERA and GST have served as weed­ing-out mech­a­nisms which will ul­ti­mately leave only strong, cred­i­ble de­vel­op­ers with the clout re­quired to at­tract in­sti­tu­tional fund­ing in the fray.

Over­all, it has been a rather messy ma­tur­ing process for the In­dian real es­tate, but it is largely so be­cause there are decades of in­cred­i­bly messy busi­ness prac­tices to be cleaned.


The on­go­ing slug­gish­ness in res­i­den­tial real es­tate con­tin­ues to work against it.

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