The pandemic has been the single most disruptive force that we have seen in our lifetimes, with disruptions and uncertainties unleashed globally. Needless to say, transactions in the real estate and infrastructure sectors also got impacted by it.
One of the main outcomes of the pandemic has been the enhanced desire for risk mitigation by real estate developers. This manifested in two of the largest office space portfolio divestments this year. These transactions provided the owner-developers with an avenue to monetise the development margin as well as the ability to move to sustainable leverage positions. They also marked a continuity of the trend of institutional capital’s appetite for the office space asset class.
Tailwinds for commercial real estate to continue in 2021
This continued interest is despite the pandemic’s oft-stated impact on office space due to the rising work-from-home trend. Some of the factors that play contrary to this hypothesis are the need for quality office spaces that meet the safety and well-being requirements, enhanced physical distancing norms which require a reversal of the office densification trends, and the positive impact on the IT sector which is one of the largest occupiers.
Monetary trends such as low interest rates and global liquidity have also bolstered the appetite for these transactions. Another key development with respect to office space was the successful listing of India’s second office REIT in these pandemic times. The tailwinds for this asset class should continue in the future.
Residential demand to depend on ensuing economic and employment scenario
Amongst other real estate asset classes, residential has seen a marked recovery in fundamental demand over the last few months given the low housing finance rates, the need felt by some for owned spaces and reduction of stamp duty in some states. However, the overall trend remains subdued and the sustainability of this demand will depend on the ensuing economic and employment scenario where the silver lining is that the worst seems to be over.
Transactions in this asset class can gain some traction with themes like inventory funding, last mile funding and affordable/mid-market housing gaining ground. The challenge for last mile funding or refinancing continues to be the thin slice of residual equity in projects and hence transaction activity is likely to be moderate at best.
Investor activity in retail segment expected to remain subdued
Retail will continue to be a challenging asset class for some time from an investment perspective. It has been the most affected by the pandemic in the short-term through lockdowns, social distancing norms and the concerns around closed spaces, and the medium term impact through potential consumer down-trading, the strengthening of online shopping trends and the lower income growth rates. Investor activity in this sector is expected to remain subdued.
Warehousing and data centre segments to hold investor interest
Finally, the green shoots are the warehousing and data centre asset classes. Both these asset classes have gained traction due to the sustainable demand boost provided by the increasing digitisation of all aspects of the economy and significant investor interest is expected in the coming years.
Infrastructure sector to continue attracting new long-term investors
Covid-19 has had a mixed impact on transactions in the infrastructure sector. While transactions continued to be consummated in the power transmission (10 transactions with disclosed deal value of US$721 million) and renewable energy sectors (28 transactions with disclosed deal value of US$2.2 billion), several transactions in the transportation sector (especially toll roads) were put on hold or cancelled.
Surprisingly transactions continued to be completed in the airports sector underlying the attractiveness of the sector to foreign and Indian developers. After the stupendous success of the privatisation of six airports last year, foreign interest continued in the sector with Aéroports de Paris taking 49% stake in GMR Airports in one of the largest deals this year.
The Adani Group reaffirmed its strong interest in the airports sector by taking a 74% stake in MIAL and signing concession agreements for three of the six airports it won last year and accepting Letter of Intent (LoI) for the other three airports. The expected rebound in domestic and international travel post the vaccine will help the process for privatisation of the next round of six airports which we expect to be launched and completed next year.
The year also saw renewed activity in the power distribution sector with Tata Power acquiring 51% in Odisha’s Central Electricity Supply Utility and getting LoI’s for supplying electricity to the consumers of two electricity distribution companies in Odisha—the Western Electricity Supply Company of Odisha Ltd (WESCO) and the Southern Electricity Supply Utility of Odisha Ltd (SOUTCO).
With the upcoming privatisation of the electricity distribution companies of the Union Territories and several states looking to invite private sector participation in power distribution, we see significant activity in the space in 2021, both from developers and financial investors.
The year 2020 also saw the bid process being launched for award of passenger trains operations on PPP basis for 12 clusters comprising more than 150 origin-destination pairs of routes. The bid saw 120 applications out of which 102 applications have been selected for the RFP stage.
The RFQ process for the New Delhi Station redevelopment project on PPP basis was also launched this year. The project involves redevelopment and operation of New Delhi Railway Station for a period of 60 years along with real estate development rights. We expect that these efforts will finally pave the way for much increased and much needed participation of private developers and foreign investors in the railways sector.
Since road traffic has picked up in H2 2020 and toll collections are now similar, if not higher as compared to pre-Covid levels, we see several transactions which were earlier put on hold getting consummated in the roads and highways space in 2021.
Already, in October 2020, Cube Highways completed the acquisition of the TOT Bundle 3 from NHAI for around Rs. 50 bn amongst other acquisitions. Investors such as NIIF and Edelweiss also completed transactions in the road sector in the second half of 2020.
The annuity nature of the Hybrid Annuity Model (HAM) projects continue to attract investors. Now that the Government of India (GoI) has eased the equity lock-in conditions permitting 100% sale of projects once 6 months from Commercial Operations Date (COD) has passed instead of the 2-year requirement earlier, we see several HAM assets being transacted in 2021.
The infrastructure sector was also attracting new long-term investors such as pension funds and insurance companies. Post Covid, these investors had put their investment plans on hold till they recalibrated their investment strategies.
Investors who did not have India offices were not able to evaluate direct opportunities unless they were a part of a consortium of investors. With the Indian economy recovering and expected to pick up further pace post the administration of the vaccine and removal of travel bans; we expect these investors to soon return to the Indian transactions’ scene.
Given that M&A and fund raise transactions are expected to continue in renewable energy (GoI has set a target of 450 GW of Renewable Energy Capacity by 2030), power transmission and HAM assets, the transportation sector (Toll Roads, Airports and Ports) is coming out of the Covid shock post the administration of the vaccine, the renewed interest in Power Distribution sector and the emergence of new sectors such as Railways, we see a number of transactions in the infrastructure sector in 2021.