Invested: more than US$4bn in 2018

Institutional investors are likely to continue infusing investments in 2019 into the maturing Indian real estate market, which offers more scope for growth than developed countries with matured real estate markets, according to a report released in Mumbai on 25 Mar 2019.

Moreover, strategic policy relaxations to boost the ease of doing business, coupled with the rapidly transformed business environment, will continue to attract private equity (PE) to Indian real estate, said the report ‘Private Equity in Indian Real Estate’.

Institutional investors have invested more than US$4 billion funds across the country’s real estate segments in 2018, according to the report by ANAROCK Property Consultants.

The commercial office segment saw the highest inflows, accounting for a massive 70% share of the total institutional investments into the industry in 2018, said the report released in Mumbai on 25 Mar 2019.

Retail real estate came in a distant second with 7%, and the residential sector drew the least private equity among the three sectors, with less than 7% of the overall share.

Of the US$14 billion PE inflow over into the sector in the last four years, 2017 and 2018 collectively saw the maximum investments to US$8.6 billion.

Shobhit Agarwal, MD & CEO – ANAROCK Capital, said: “Currently, funding is a major hurdle for the Indian real estate’s growth prospects, especially post the Non-Banking Finance Company crisis.

“Private equity funding is the best alternative for developers who qualify for it. Despite a decline of 9% 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,” he said.

“From this point onward, commercial real estate – especially Grade A office spaces – will attract considerable investments.

“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,” he said.

The report further states that despite deal numbers declining since 2015, the average deal size has increased by nearly 172% in the last four years – from US$47 million in 2015 to US$128 million in 2018.

Interestingly, the top 5 deals in 2018 alone contributed almost 50% 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% in PE investments – from nearly US$2.2 billion in 2017 to over US$2.8 billion in 2018.

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% of the overall share of the total private equity investments in 2018, Agarwal.

“Considering high demand, fund exits have been relatively easier in commercial real estate – and with REITs being launched, they will become even easier,” he said.

Q1 2019 PE Update:

In less than 3 months into 2019, ANAROCK has seen PE equity investment touching almost US$1 billion, the majority of it coming through a single deal when Brookfield acquired a portfolio of hotel assets of Leela Ventures for US$570 million recently.

Also, investors’ interest in long-term real estate plays with preferred developers continues to be visible with more than US$500 million of additional platforms getting created in just 2.5 months.

“As we write, 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,” said Agarwal.

Key Deals in Q1 2019:

Brookfield: Hotel Leela Ventures’ Hotel US$573 million.
Hines: DLF’s Office US$127 million.
LOGOS India: Casagrand Distripark’s Logistics & Warehousing US$98 million.
Source: ANAROCK Research.

Other Report Highlights:

Between 2016 and 2017, the main Southern cities cumulatively saw just 18% (in 2016) and 17% (in 2017) of the total PE investments. This share increased to 54% in 2018 through a series of investments.

The retail real estate sector is riding high on India’s growing consumerism – not just in metros and tier 1 cities but also in tier 2 & 3 cities. Nearly 46% of institutional investments in retail spaces between 2015 and 2018 were made in non-metro cities like Bhubaneshwar, Chandigarh, Indore, Amritsar and Ahmedabad.

Due to multiple issues like stalled/delayed projects, the liquidity crunch, high property values and low sales, the residential real estate sector has been shedding PE investors’ interest. Between 2015 and 2018, equity investments into the sector reduced from 47% to a mere 3%.

However, the affordable housing segment is gaining momentum and investors will seek to secure a slice of this increasingly lucrative pie.

Best-performing Cities:

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

Hyderabad witnessed a sudden burst in investments in 2018, attracting more than US$1.1 billion of private equity – a more than three-fold increase in investments compared to the collective previous three-year period. This growth spurt was largely led by commercial real estate, with the Phoenix Group receiving vast PE infusions through multiple deals.

Hyderabad surpassed Bangalore and Chennai, the other two major South Indian cities, in investment inflows. fiinews.com