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PE inflows in residential at 4-year low, commercial at 4-year high: Report

At the city-level, Mumbai continued to be the most-preferred destination for overall PE investments, seeing nearly 38 percent of the total capital inflows in 2018

The office has total 30 floors spanning multiple buildings and has a capacity to house 7,400 employees which Flipkart says is enough for them. The buildings are connected by nine bridges.
The office has total 30 floors spanning multiple buildings and has a capacity to house 7,400 employees which Flipkart says is enough for them. The buildings are connected by nine bridges.

Institutional investors invested more than $4 billion funds across the country's real estate segments in 2018. Total private equity inflows in residential segment stood at $266 million in 2018, an 82 percent decline since 2015. Commercial real estate drew the lion’s share with USD 2.8 billion in PE funds, says a report.

The average deal size increased by over 170 percent in four years – from $47 million in 2015 to $128 million in 2018. Overall the real estate sector attracted over $4 billion of PE funds in 2018; a decline of 9 percent against 2017. In less than 3 months into 2019, PE equity investment into real estate are close to $1 billion, according to a report by Anarock titled Private Equity in Indian Real Estate.

At the city-level, Mumbai continued to be the most-preferred destination for overall PE investments, seeing nearly 38 percent of the total capital inflows in 2018. Hyderabad witnessed a sudden burst in investments in 2018, attracting more than $1.1 billion of private equity — a more than three-fold increase in investments compared to the collective previous three-year period. Hyderabad surpassed Bengaluru and Chennai, the other two major South Indian cities, in investment inflows, says the report.

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The commercial office segment saw the highest inflows, accounting for a massive 70 percent share of the total institutional investments into the industry in 2018. Retail real estate came in a distant second with 7 percent and the residential sector drew the least private equity among the three sectors, with less than 7 percent of the overall share.

The report says that out of the total PE inflow of USD 14 bn into the sector in the last four years, 2017 and 2018 collectively saw the maximum investments to the tune of USD 8.6 billion.

"Currently, funding is a major hurdle for the Indian real estate’s growth prospects – especially post the NBFC crisis. Private equity funding is the best alternative for developers who qualify for it. Despite a decline of 9 percent in PE inflows in 2018 against the preceding year, 2019 will bring a marked increase in private equity funding because of India’s first REIT listing," says Shobhit Agarwal, MD & CEO - ANAROCK Capital.

"From this point onward, commercial real estate — especially Grade A office spaces — will attract considerable investments," he says. "Nevertheless, much of the industry's prospects also hinge on the outcome of the upcoming general elections. Institutional investors will continue to pump in funds into the real estate industry if they can rely on political stability, proactive policies and a favourable microeconomic environment."

The report further states that despite deal numbers declining since 2015, the average deal size has increased by nearly 172 percent in the last four years — from $47 million in 2015 to $128 million in 2018. Interestingly, the top 5 deals in 2018 alone contributed almost 50 percent of the total investments during the year. PE investors have become more cautious about selecting and associating with developers; however, once confident, they are making larger investments.

"A segment-wise breakdown indicates that commercial realty saw an annual increase of 27 percent in PE investments – from nearly USD 2.2 bn in 2017 to over USD 2.8 billion in 2018," says Agarwal. "High occupancy levels, relatively lower rentals in dollar terms, quality Grade A assets and high-quality tenants are the key reasons for commercial space to draw around 70 percent of the overall share of the total private equity investments in 2018. Considering high demand, fund exits have been relatively easier in commercial real estate - and with REITs being launched, they will become even easier."

Also, investors’ interest in long-term real estate plays with preferred developers continues to be visible with more than USD 500 million of additional platforms getting created in just 2.5 months. As we speak, the REIT offering by the Blackstone – Embassy Group is ongoing. If the interest for this new investment platform is as expected, it will open a new chapter in the country’s real estate space.

Going forward in 2019, institutional investors are likely to continue infusing investments into the maturing Indian real estate market, which offers more scope for growth than developed countries with matured real estate markets. Moreover, strategic policy relaxations to boost the ease of doing business, coupled with the rapidly transformed business environment, will continue to attract private equity to Indian real estate.

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First Published on Mar 26, 2019 11:56 am
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