Private equity (PE) funds invested $7.1 billion in real estate in 2017 — the most in 10 years — despite the stress in the sector following the November 2016 demonetisation exercise and implementation of GST in April 2017, market research data show. This investment flowed mainly into commercial real estate, which, unlike the residential part of the business, has been booming.
Data provided to The Indian Express by research firm Venture Intelligence show private equity investment in real estate crashed from $7 billion in 2008 to $1.3 billion in 2009 before slowing inching back. Investment in the current year has been $5.1 billion as of November-end.
“Most of the private equity investments that are happening are in the commercial sector and not in the residential (sector). Commercial, as a sector, has been doing really well. Since 2015, the absorption of office space has been upwards of 40 million square feet per annum. Last year, it was 42.5 million square feet, and in 2018, we expect it to be more than 40 million square feet. Because of the leasing that is happening in the commercial space, the overall sentiments are pretty strong. This is why more and more investors are picking up stakes in completed and leased out assets,” Abhinav Joshi, head of research at the India operations of CBRE, the US-based commercial real estate services and investment firm.
In 2017, a total 78 private equity deals were transacted in the sector — the biggest one of which was purchase of 33.34 per cent stake in realty major DLF’s rental arm by Singapore’s sovereign wealth fund GIC for around $1.38 billion. In a presentation about the deal, DLF had said that the transaction would mean significant debt reduction in the company’s residential business.
“The weakness in real estate is largely in the residential sector because of reasons such as demonetisation, GST, and RERA that have impacted the sector directly. Sales and registrations have been going down, developers have been very cautious while launching new projects. New supplies have also gone down. In fact, last year was a bottom year in terms of the housing market,” Joshi said.
Next to the DLF-GIC deal in 2017 was the $600 million investment by the Singapore-headquartered sustainable urban development and business space solutions provider Ascendas in Firstspace Realty. Given the strain in the residential sector, developers may have also parted with stake in certain commercial projects at below the market price to raise funds and enhance their liquidity situation.
“Private equity investment momentum has been strong over the last 4-5 years, but only a few distress sales by developers have happened where liquidity was a requirement. Because of the stress in residential sector, liquidity has been impacted in general. But largely deals have happened at the market rate,” Joshi said.
The real estate sector as a whole has, however, remained short of funds. The Indian Express had reported last month that the government was likely to underline at the RBI’s Central Board meeting on December 14 that the stress in the real estate sector threatens job losses. RBI data on sectoral deployment of funds shows that while commercial real estate (CRE) witnessed significant slowdown in bank credit availability post-demonetisation, the credit outstanding for CRE witnessed a contraction for the first time in 13 months. In September, it contracted 0.8 per cent over the same period last year. CRE comprises loans extended to builders for construction of housing buildings, hotels, shopping malls, industrial parks, office blocks and hospitals, which are classified as commercial real estate by RBI.
“This money (from PE investors) has gone into completed assets. Blackstone, Brookfield, GIC have invested in completed office buildings, which is not risky. The market is very bad on the residential side, and money has not gone there at all. PE investors have cherry-picked fully completed and leased out assets giving a return of 8-9 per cent per annum,” Anuj Puri, chairman of Anarock Property Consultants, said.
The PE investment in commercial real estate has gone beyond the metros and tier-I towns. “Even in tier-II cities, private equity investors have been looking at mall spaces with good footfall, tenant mix, and strong sales. They have also been acquiring such properties,” Joshi said.
“While we say that these policy measures have impacted the sector, for the investors it is positive, as they view these as structural reforms. There is a regulator for the sector now, there is more clarity on GST, which is why investors are expected to put in more money in the real estate sector,” he added.