Cushman & Wakefield, global real estate consultants, estimate that 2016 could record the highest Private Equity investments in real estate (PERE) since 2008 which is estimated to be INR 436 billion. Of the total expected PERE, over INR 245 billion is expected to be in the second half of the year, while the first half of 2016 recorded a total of INR 191 billion of PERE. The period from January to June, saw an increase in PERE by 64% to INR 191.370 bn as compared to INR 116.349 bn recorded in the same period of 2015. The total number of deals closed during H1 2016 increased 24% to 57 from 46 in the corresponding period of 2015.
The residential asset class commanded the largest share of 44% in the total investments in H1 2016 while commercial office asset class accounted for 22% of the investments. Retail saw a significant increase in their share in investments to 18% in H1 2016 compared to 2% recorded in H1 2015. Hospitality and mixed-use asset classes cumulatively accounted for the remainder of the share (17%).
Anshul Jain, Managing Director, India, Cushman & Wakefield, “Indian real estate has seen good traction from both domestic as well as global investors on the back of reviving economic confidence breaching previous levels. This bull run is expected to continue in the short term with more investments being made in completed / leased corporate assets and other commercial activities such as retail and hospitality and we expect 2016, to be one of the best years in recent past for the RE sector.”
He further adds, “However, by the mid of next year 2017, we expect to hit a peculiar situation of non – availability of suitable projects for investments, as most of the investible properties would be committed to. Some developers may hold onto their projects in order to cash in on the advent of REITs and may only release their properties to such investment options. The slowdown may happen in residential when the markets revive. As long as market is low and stress this there, there is need for money, thus presenting opportunity for PE players to enter, as good returns are expected.”
Estimating from the pipe line for the rest of the year of 2016 is expected to witness the highest PE investments since 2008 through the sale of sizeable stakes in office portfolios by some of the prominent Indian developers. The cumulative value of these stakes is estimated to be between INR 21,500 crores (215 bn) and INR 24,000 crores (240 bn). Owing to improving economic outlook and uptick in leasing activity for office spaces, some of the PE firms are increasing their portfolio of office spaces, possibly with an intention to launch their own REITs.
The relaxation in FDI norms in other sectors such as food processing, defense, pharmaceuticals, etc. made during the second quarter is expected to attract investments, which in turn is likely to boost demand in the real estate sector, specifically in the industrial, logistics and warehousing assets. These are good progressive FDI policies that the government has announced. The government however, needs to ensure effective implementation and monitoring of the announced policies in infrastructure development, land digitization, RERA implementation, title insurance, Goods and Services Tax (GST), etc.
RESIDENTIAL ASSETS RECEIVED 44% OF TOTAL PERE INVESTMENTS
Residential assets continued to witness the majority share of total PE investments at 44% during the first half of 2016. Domestic investors accounted for about 80% of the investments in residential assets with the remainder being made by foreign investors. While the cumulative investments include both entity and project level investments, majority of investments (75%) were made by via the structured debt strategy. Domestic investors have preferred investments in residential assets as it is relatively easier to exit the investments with shorter investment cycles while allowing investment via a structured financing strategy with pre-agreed terms. Cumulative investments in residential segment increased 22.3% to INR 83.65 bn in H1 2016, over the same period of the previous year.
INVESTMENTS IN OFFICES GROWING RAPIDLY
The investments in office assets have grown from INR 1,647 crores (1.64 bn) in 2014 to INR 4,236 crores (4.23 bn) a 157% growth in first six months of 2016. Factors such as increased foreign investments and leasing activity, strong GDP growth and economic forecasts, improved governance, government initiatives, etc. have contributed towards attracting investments. Owing to few large deals, domestic investors accounted for 63% of the investments in the office assets in first half of 2016. Foreign investors accounted for 25% of the investments and the remaining 12% was made by joint ventures of domestic and foreign investors.
RETAIL ASSET CLASS SET FOR REVIVAL
The retail asset class (malls) that had remained subdued for over 5 years is now witnessing increased investor interest. The retail asset class accounted for about 18% of the total investment volume during the first half of 2016 compared to only 2% recorded during the same period in 2015. Private equity funds are increasingly exploring opportunities in the retail segment as a revival is expected and also because the retail assets can be listed under a REIT portfolio.
MUMBAI CONTINUES TO RECEIVE HIGHEST PE INVESTMENTS
Mumbai continued to account for the highest share in investments (36%) followed by Delhi NCR accounting for 33% of the investments during the first half of 2016. Bengaluru received 11% of the investments during the same period. Mumbai continued to witness the highest share of investments owing to factors such as presence of organised real estate developers, availability of projects suitable for PE investments, higher capital values that contributes towards large deal sizes, etc.
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