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.
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.
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.
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.
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.
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.
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.