QIPs lead the show as real estate sector sees 17-year-high equity fundraising

The equity fundraising activity seen in 2024 highlights a marked turnaround in the fortunes of the real estate sector, post the covid-19 pandemic, and the return of public market investors to the sector.

Real estate companies have raised Rs 14,572 crore (till August 2024) via share sales through initial public offerings and qualified institutional placements (QIPs), making it the sector's second-best year since the heady heights of 2007, according to primary markets tracker Prime Database.

In 2007, equity issuances touched Rs 17,509 crore, data shows. The numbers are based on equity issuances through IPOs, QIPs, FPOs, rights issue, OFS etc., and excludes fundraising by REITs, which are a recent phenomenon.

QIPs drive fundraise, hit a record

The fundraising frenzy is driven by qualified institutional placements (QIPs), with Rs 11,746 crore being raised through this route, an all-time record, data shows.

The biggest QIP fundraises this year include the one by Prestige Estate Products, which raised Rs 5,000 crore, and Macrotech Developers, which raised Rs 3,282 crore. 

“In FY24, real estate developers raised over Rs 10,000 crore from the capital markets and we see a flurry of activity in this sector over the next 6-12 months. There are several real estate firms that have announced fund-raise plans through QIPs and we also expect to see some IPO issuances from real estate developers,” said Vikas Khattar, MD, Co-head of Investment Banking, Head, ECM & FSG, Ambit.

The equity fundraising activity seen in 2024 highlights a marked turnaround in the fortunes of the real estate sector, post-Covid, and the return of public market investors to the sector.

“Post-Covid, the renewed interest from investors in the real estate sector is driven by the continued uptick in residential sales across geographies (customers opting for bigger homes, increasing tribe of people opting for second homes), improved commercial leasing demand and better ADRs (average daily rates) for the hospitality sector.  All these factors have contributed to enhanced growth and profitability, leading to a re-rating of the sector from a valuation perspective as well. Companies are using the buoyancy in valuations to raise capital to drive future growth by acquiring new land parcels, as existing inventory levels are reducing ,” said Khattar.

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Getting off a debt-heavy diet

The record equity fundraising is also a sharp departure from the debt-fuelled growth of the past, when equity investors shied away from the real estate sector.

Experts said that initially, post the Covid boom, real estate developers continued to rely on other sources of capital, but were not sure if the post-pandemic boom would last long. In the last year or so, with demand still remaining robust, developers have become confident of approaching the equity markets to raise funds.

“At first, most developers continued to liquidate their existing development potential, not sure whether the demand will hold up. But demand did continue and fundamentals indicate the momentum is here to stay. Developers now recognise the necessity to replenish land bank/expansion potential in order to maintain growing momentum that needs capital/ investment. Hence, funds are being raised,” said V Prashant Rao, Director & Head - ECM, Investment Banking, Anand Rathi Advisors.

“Given that real estate is a cyclical business and the past experiences with debt-funded growth, equity seems to be the preferred mode as it’s a more patient capital compared to debt,” added Rao.

IPOs in the pipeline

While QIPs are leading the charge, the sector is also starting to see some IPOs. And it is not just real estate developers. Allied sectors, such as hospitality and co-working, are seeing interest from investors and more IPOs are expected to come from these sectors.

“A lot of QIPs in the real estate sector has been from premium builders who are seeing demand from HNI investors and that has reflected in their stock prices in the last 12-18 months. With respect to co-working companies, this reflects the response to the Awfis IPO earlier this year and shows that pretty much everyone is back to offices physically. We expect to see 3-4 IPOs in this space in the next 12 months,” said Prashant Gupta, Partner and Head of Capital Markets at law firm Shardul Amarchand Mangaldas.

“Hospitality companies have also seen a lot of activity in the public markets, with IPOs from SAMHI and Juniper, plus other DRHP filings in recent weeks. This co-relates to the post pandemic travel demand in India,” added Gupta.

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Arka Mookerjee, Partner at law firm JSA, added that given the strong demand for recent IPOs and with more domestic capital expected to flow into the capital markets, one could see more IPOs from real estate and allied sectors in the coming months.

“On account of the astronomical domestic subscriptions for IPOs in the last couple of months and projections of unlocking FDs & post office savings, among other instruments, one can only guesstimate the potential investments currently waiting on the bench. In such a scenario, the usual suspects of consumption-based segments will gain more traction over others,” said Mookerjee.

Headwinds

While it is a very strong year for real estate companies in the capital markets, experts caution that rising prices, timely execution of projects and financial discipline are certain things that investors need to keep a watch on.

“In certain micro markets, prices have risen quite sharply that it might be difficult to justify the fundamentals. If this continues unabated, it could have some impact on the velocity of sales and a sobering effect on the overall valuations,” said Khattar of Ambit.

Anand Rathi’s Rao added that if timely project execution and the ability to meet financial commitments are to be ensured, the need for being prudent in financial and balance sheet management becomes all the more important.

“Some of the developers this time around seem much more prudent, but the surge seen in volume needs to be backed up by a scale-up in project execution abilities. Any failure to scale up execution abilities could mean project delays and the sector may see loss of consumer confidence,” he added.