PE focus on housing projects set to increase

While private equity investors have so far shied away from the residential real estate segment, recent policy changes may open up avenues for long-term growth, especially in the affordable and mid-segment housing

Partnerships, often between investors and developers, create a pool of money that is available for all projects matching a specific set of criteria, without having to go through the time-consuming approval process. These partnerships are also called platforms. Over the past two-three years, India has seen the creation of various such equity or debt platforms.

So far, more than USD 2.8 billion worth of platforms are already in place, largely equity-based and showing a shift in focus to residential, especially the affordable and mid-segment housing projects. This model of investment is expected to grow further in the future.


PE focus on housing projects set to increase

Source: JLL Capital Markets Research


Why equity kept away from residential realty

From a historic high seen in 2009, when the share of private equity (PE) inflows into residential real estate peaked to 60% of the overall pie, it has gradually reduced to 10% in 2016. This 10% figure is same as the investment split seen in 2006, which was the first time equity’s interest was tracked into the residential asset class. PE investment was entirely focused on the commercial asset class, in the initial few years.

After the global financial crisis in 2008, equity infusion has been largely restricted to office projects that are closer to completion. Various reasons led to equity investors shying away from residential projects. A major reason was the lack of uniformity in rules followed by the states. Other reasons included project delays, limited legal options for investors and inadequate transparency and corporate governance.


PE focus on housing projects set to increase

Source: JLL Capital Market Research


Why the real estate market is turning favourable for equity

However, through the implementation of the Real Estate (Regulation and Development) Act (RERA) and demonetisation, the government has worked towards removing all major inconsistencies in the system. While the real estate business has currently taken a step back due to these, it will set a very strong foundation for long-term growth. Equity investments at such times, can work extremely well for long-term investors.

See also: PE investment in RE increases 22 pc y-o-y, in Jan-Sept 2016: Report

With limited cash outflows allowed until completion of the project (thanks to the RERA) and lower demand for properties (thanks to demonetisation and the Benami Property Act), developers will remain under pressure. Money circulation will slow down and new cash flow generation will reduce further. With limited scope for further leverage, developers will be open to providing good entry points to the long-term equity investors. While a few equity-related risks would continue, attractive entry points, will provide a higher margin of safety to equity investors. The table above illustrates how a few investors have already realised this and taken steps accordingly.


Top-five criteria for equity investors, in choosing the right partners for creation of platforms:

  1.   High focus on corporate governance.
  2.   Proven corporate track record.
  3.   Alignment of investment and operational philosophy among the partners.
  4.   Equity infusion by the developer.
  5.   Potential for long-term successful partnership.

(The writer is chairman and country head, JLL India)


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