$4.8 billion itch

Tags: Real Estate

The real estate sector looks to PE investment from foreign climes to pull their chestnuts out of the fire in 2016

Come 2016 and the world of realty looks heaven-word and utter the golden words in unison: private equity (PE) investments please. Why? Because that is the mantra it is looking for to revive its fortunes in the New Year.

At the fag end of 2015, the central government eased the norms for FDI in the real estate sector, along with 14 other sectors. In the new scheme of things, non-repatriable investments by NRIs, as also persons of Indian origins (PIOs), will be treated as domestic investments, not subject to foreign direct investment caps.

There is reason for this optimism. Sector analysts say PE investments in real estate could surpass the $4.8-billion fund infusion on evidence in 2015. While the way PE investments are structured could see a change, the money is set to be invested in select cities and projects, they point out, adding that anywhere between $3 billion and $4 billion are either raised or close to be raised by funds that are real estate-focused.

“After opening up to FDI, the profile of developers, as well as ownership patterns, will start changing. This will lead to a drop of ownership requirements by Indian developers and a rise in ownership by PE funds and MNC developers,’’ predicts Anuj Puri, chairman and country head, JLL India.

PE funds invested about $2.4 billion in the real estate sector, across 53 transactions, during the first nine months of 2015, surpassing the full-year investments of $2.1 billion in 2014 across 80 deals, data available with VCCEdge, financial research platform of VCCircle that tracks investments, reveals.

That’s not all. There are a number of smaller deals using the collaboration route. Points out Brotin Banerjee, MD & CEO, Tata Housing Development Company: “With overall improvement in the investment climate, the year also saw greater mobility of funds from international investors and PE firms into Indian real estate. The stability in property prices across the major locations along with reduced rate of interest, has led to an increase in consumer confidence and we believe markets will only improve from here. The sector has been demanding industry status and this will help bring in change for the whole sector.”

In order to encourage FDI in real estate, the Centre has relaxed norms related to entry conditions (quantum of investment and size of projects) as well as exit conditions (lock-in period and phase-wise exits). This, according to experts, could trigger a new wave of FDI coming into the sector in the immediate foreseeable future.

Amidst indications and signals that the Indian government is more receptive to overseas interest, a number of foreign PE investors are exploring various fund raising projects and could eventually push the real estate bar up to $4 billion, the bulk of this figure coming from overseas.

Liberalisation of laws restricting overseas ownership has gone down well with the stakeholders in 2015 and it is expected, optimistically, that the sector will carry forward on that momentum.

This fund raising move is expected to allow much of the unsold property to be taken out thereby reducing the overhang on prices. Until that happens, it is difficult to see why investors will suddenly, en masse, invest in Indian property.

Says Anshuman Magazine, chairman & MD, CBRE South Asia, “With the recent relaxation in guidelines, the government has now permitted 100 per cent FDI under the automatic route in completed projects for the operation and management of business centres. This easing of investment restrictions will now, hopefully, help in the monetisation of completed commercial assets, increasing liquidity for most development firms in the country. This is a tremendous opportunity for foreign investors and in the long run can significantly boost the share of foreign capital in India’s real estate sector.”

Like many, he believes that once investments begin to flow in, the supply of new, quality office space would still take some time to come into the market. ``Given the sustained demand for investment-grade spaces from corporate occupiers, this would keep up the pressure on rentals across key office districts in leading cities through forthcoming quarters. Another major challenge in the coming year will be the creation of large scale, sustainable infrastructure across our leading metros,” he avers.

There are, however, some other analysts who feel that the troubled overhang of rental properties may start to come down and tighter regulations covering developers and investors should inject more confidence. There is a growing belief that property developers have learnt lessons from the past and are unlikely to repeat their mistakes.

The real estate market is perceived to be maturing and as a result, the risk-return expectations have come down to a more sustainable level. According to a recent JLL India report, Mumbai, Chennai and Bangalore showed a marginal decline in unsold inventory.

Puri of JLL believes 2015 has been an interesting year for capital market activities in the realty stream. While the PE focus has continued to remain high on residential and office projects, entity-level investments and platform-level deals also came into the limelight, indicating increase in investor confidence.

In terms of asset focus, residential projects attracted a considerable share of funding; however, equity investment in this space still remains insignificant. Income-yielding office projects inveigled a majority of equity investments. In terms of geographical spread, the focus was restricted to tier-I cities with NCR, Mumbai and Bangalore – as can be expected - attracting a majority of investments (73 per cent), reflecting a past broad trend.

In another significant drift, PE funds and non-banking financial companies (NBFCs) are joining hands to invest in real estate projects to hedge risk in a sluggish market and undertake big-ticket transactions.

Consider two such transactions:

*** Piramal Fund Management and Altico Capital India co-invested Rs 720 crore in multiple projects of Century Real Estate Holdings in Bangalore in one of the largest structured debt transactions.

*** In another case, Shapoorji Pallonji Group teamed up with Standard Chartered Private Equity, International Finance Corporation (IFC) and the Asian Development Bank (ADB), to build 20,000 affordable homes across the country.

For good measure, Tata’s Brotin Banerjee suggests some remedies. “There is need to streamline taxes and bring in further tax concessions to enable more liquidity in the economy-boosting higher consumption. We are hopeful that the GST will be able to address this concern. Overall, it appears to be a benefactor for the real estate regime, primarily in light of the expected free flow of credit.”

The sector is looking expectantly at the Union budget. Hopes Rajesh Prajapati, managing director, Prajapati Constructions: “The coming budget should address the issue of much-needed realty reforms and REITs. We look forward to easy access of funds from banks and financial institutions at the same rate of interest as other industries in India are given loans at.”

Insiders insist 2016 will be brighter. S.K Sayal, MD & CEO, Bharti Land, believes `the realty scenario is slowly turning around.’’ He concludes: ``attesting to the allure of residential space, most investments took place there, with commercial property attracting less than one-fifth of PE inflows.’’ He joins a long and growing list of developers who entertain similar hopes.

ritwikmukherjee@mydigitalfc.com

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