Private Equity Investments In Real Estate In Q1 2015 Almost Doubles YOY

Global real estate consultancy, Cushman & Wakefield’s latest report on Private Equity investments in Real Estate (PERE) revealed that total inflows in the sector for Q1 2015 were INR 5,168 crores / INR 51.7 billion (bn) (USD 0.8 bn), higher by 85% from the same quarter a year ago (INR 2,800 crores / INR 28.0 bn / USD 0.4 bn). However, it was marginally lower by 5.6% compared to the previous quarter. The residential sector attracted the highest transaction volumes during the quarter with a 53% share in total investment activity, followed by the commercial office sector, which had a 47% share.

The increase in PERE investments during Q1 2015 was due to improved market sentiments and higher investments in residential and commercial office assets, which increased by 158% and 68% respectively compared to Q1 2014. 

Although Chennai was the only city, which witnessed investment in commercial office in Q1 2015, leased office assets such as IT Parks and IT-SEZs are likely to gain significant interest from foreign investors, due to low risk owing to high occupancy levels along with stable rental yields and significant potential for capital value appreciation. In addition, the introduction of REITs in India is likely to boost investments as investors now have an exit route.

In Q1 2015, residential assets recorded the second highest PE investment since 2008. The total value of investments in the residential sector was 2.5 times more than Q1 2014 and was recorded at INR 2,752 crores / INR 27.5 bn (USD 0.4 bn). Relatively attractive return on investments and easy exits, increased focus on housing from the Narendra Modi-led BJP government and high funding needs are likely to sustain the high investments in residential assets. Amidst liquidity issues faced by residential developers due to subdued demand and restricted access to debt funding, PE funds have emerged as an important alternate source to meet the funding requirements. PE funds continue to make investments in the residential sector at the project level rather than at the entity level to protect their investments.

The total investment in commercial office assets was recorded at INR 2,416 crores / INR 24.2 bn (USD 0.4 bn), which increased by 68% y-o-y. Q1 2015 witnessed the third highest investment in the commercial office sector since 2008. Attractive valuations, stable yields, significant potential for capital value appreciation due to improving macro-economic conditions, healthy demand for office space and clarity on REITs has led to increased interest from foreign investors for prime office assets across the top cities. Around USD 3.4 bn has been invested in the commercial office sector since 2011, compared to only USD 1.1 bn between 2008 and 2010.

Commenting on the report, Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, said, “With improving macro-economic conditions, enabling policy environment, recovering demand, attractive valuations and increasing capital requirements of the Indian real estate sector, PE funds are likely to increase their investments in the next few years. Residential and leased office assets will remain as favorites with PE funds as demand for funding remains strong in the residential projects and given the 35% y-o-y increase in office net absorption, there is ample scope for the funds to generate high yet stable rental incomes. However, the private equity funds are likely to take only calculated risks and collaborate strictly with renowned developers to protect their investments.”

The total number of deals fell to 16 in Q1 2015, compared to 18 in the same quarter a year ago. However, the average deal size more than doubled and was noted at INR 3.2 bn (USD 51.9 mn), compared to INR 1.5 bn (USD 26.3 mn) in Q1 2014.

Chennai recorded the highest level of transaction volume in Q1 2015 with investments of INR 2,881 crores / 28.8 bn (USD 0.5 bn), nearly six times the investments in 2014. Investments in Chennai were primarily in residential assets (84%) and remaining 16% were in commercial office assets. Delhi-NCR followed Chennai with second highest investments at INR 926 crores / INR 9.3 bn (USD 148 mn). Investments in Bengaluru more than doubled from the previous quarter and were recorded at INR 902 crores / INR 9.0 bn (USD 147 mn) whilst investments in Pune halved from a quarter ago and were noted at INR 320 crores / INR 3.2 bn (USD 50 mn).