Global investors are expecting the warehousing segments to emerge stronger from the crisis driven by the renewed demand from e-commerce segments due to lockdown.
The real estate sector in India attracted private equity investments of $2,308 million, across 11 deals during the period between January 1, 2020, and September 30, 2020. Of the total investments, office segment attracted the largest share of $1,871 million, claiming 81 percent share, followed by warehousing at 10 percent and residential with 9 percent, a report has said.
Around 18.1 mn sq ft of the office was transacted in YTD 2020. Out of the $1.87 billion of investments in 2020, $1.64 billion was a part of a large office deal. The PE investments in office segments were down 31 percent year-on-year in year-to-date 2020 compared to $2.7 billion during the same period last year.
In the last 10 years, January 2011 - September 2020, Mumbai took the largest quantum of office investment worth $5,015 million followed by the National Capital Region (NCR) with $2,803 million and Hyderabad with $2,010 million, a Knight Frank report titled Investments in Real Estate - Trends in PE Investments – Q3 2020 has said.
The report also assesses the assets owned by the government’s Public Sector Units (PSUs) and estimates that the top 45 companies hold commercial properties viable for Real Estate Investment Trust (REIT) at a potential of over Rs 1.2 trillion.
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The report highlighted that the quantum of the REIT potential can be significantly higher than Rs 1.2 trillion if the office buildings of the 45 PSUs are valued on market value basis and also with the addition of office assets of other listed PSUs along with the office assets of the unlisted PSUs which are under the direct ownership of the central government.
As for the residential sector, between January and September 2020, only three deals worth $216 million were transacted, which were down 67 percent YoY compared to $659 million during YTD 2019, it said.
For several years, residential prices have been stagnant and have even corrected at certain locations. The cost of input for developers has also not corrected to the same extent. Sales velocity has come down compared to the peaks of the earlier period which has dented the profit margins of developers and lowered the Internal Rate of Return (IRR) from residential projects. On account of all these factors, investors have slowed down their investments in residential projects.
In the case of the retail sector, no investment deals took place in 2020. The pandemic-induced lockdown had forced all malls to halt their operations and this has adversely affected their businesses. Investors are fearing that the virus is likely to keep consumer footfalls low even after reopening of malls across India, the report said.
In the year-to-date 2020, the warehousing sector attracted PE investments worth $221 million which were 86 percent YoY lower compared to $1,538 million during the same period last year. This drop can largely be attributed to a significant percentage of capital which was committed to the warehousing sector in India over the past three years awaiting deployment.
Global investors are expecting the warehousing segments to emerge stronger from the crisis driven by the renewed demand from e-commerce segments due to lockdown and have been taking up positions in warehousing assets.
“Private equity investors have taken advantage of this period of economic slowdown to scout for Grade A assets with strong growth trends for investments. As a result of which, assets in office segment saw positive investment activities. The average deal size for office investments was also seen to be remarkably higher in YTD 2020 as compared to the full year 2019,” said Shishir Baijal, chairman and managing director, Knight Frank India.
“We have witnessed healthy investor interest in the office segment despite the slowdown this year. While the investors are currently cautious due to the disruptions in the real estate sector and the sharp economic slowdown across global economies, we feel that the investor interest in Indian real estate will remain strong in the long term,” said Rajani Sinha, Chief Economist & National Director – Research, Knight Frank India.In recent years, PE investors have been aggressively committing equity capital to rent-yielding commercial assets. In addition, investors have gone slow in their investments in residential which was done predominantly through the debt/structured debt route. Consequently, the share of equity investments since 2017 has dwarfed that through the debt route.