Private equity inflows into Indian real estate is expected to USD 4 billion in 2017. However, a low risk appetite among investors, is likely to trigger a shift in investments’ share from the residential sector to pre-leased office and retail assets, says a report titled ‘Decoding PE funds in Indian Realty 2017’ by Knight Frank India.
Key findings of the report
- Private equity investment in 2017 is estimated to exceed USD 4 billion this year, well past the 2015 mark and the highest since 2010. It is pertinent to note that one major deal alone accounted for USD 1.8 billion.
- Private equity investments into Indian real estate had almost stagnated between 2011 and 2014. However, with the new government assuming office in 2014 and the subsequent rollout of a battery of reforms, there has been a paradigm shift in investors’ interest. From an average investment of USD 2.1 billion in 2011-14, capital flows rose by 57 per cent, to an average of USD 3.3 billion between 2015 and mid-September 2017.
- In 2017, the number of deals dwindled to 13, just over one-fourth of the tally in 2010. However, the average investments per deal increased 10-folds to USD 246 million per deal.
- Bulk of the investments in 2016-17 went into pre-leased properties. Investments into development sites saw a sharp drop, courtesy the low risk appetite among investors.
Speaking about the findings, Samantak Das, chief economist and national director – research, Knight Frank India, said, “The dominance of institutional funds in the private equity investments’ pie, reflects long-term confidence in India’s strong economic fundamentals. In line with the change in the investors’ profile, we have observed a dramatic shift in capital movement from the residential sector to pre-leased office and retail assets. However, we believe that investors would revisit the residential sector on the back of the reforms-driven new order, with focus towards affordable housing projects.”
See also: Will private equity investments in Indian realty increase or decrease?
Asset class-wise break-up
- The share of private equity investments into residential projects nearly halved from 50 per cent in 2011 to 28 per cent in 2016 and further dropped to a meagre four per cent in 2017.
- The office market that accounted for 29 per cent of PE funds in 2011, today stands at almost two-third (66 per cent) of the investments into Indian real estate.
- From a negligible number in 2011, PE investments in retail climbed to 19 per cent in 2016 and sustained at 14 per cent in 2017.
- The share of warehousing in total investments, nearly doubled from nine per cent in 2011 to 16 per cent in 2017.
Origin and destination of funds
- A majority of the private equity investors in 2017 were domestic investors, followed by investors from the US and Canada.
- Singapore had the highest investment per deal, on account of a single, big-ticket GIC-DLF deal of USD 1,800 million.
Changing investor’s profile
- More than 80 per cent of the PE capital contributors in 2017, were long-term sovereign and pension funds.
- Pure private equity funds and real estate funds continue to show trust in residential assets.
City-wise break-up
Gurugram attracted 56.4 per cent of the total investments in real estate, due the GIC-DLF deal of USD 1,800 million followed by Mumbai (39.8 per cent).
According to Rajeev Bairathi, executive director and head – capital markets, Knight Frank India, “The bias of large Institutional investors, to acquire high-ticket and marquee leased out office and shopping centre assets at aggressive valuations, indicates that they expect the current leasing demand for such assets across both categories to remain buoyant in the foreseeable future, thereby, putting upward bias on the lease rentals and the asset valuations in near future. Also, the exit barrier and therefore, the liquidity risk perception in such assets, is much lesser given that the creation of public markets in the form of REITs is just around the corner. In the residential sector, however, the private equity investors would continue to remain cautious, with a majority of them waiting for the current consolidation cycle, driven by both the market and regulatory forces, to run its full course before they re-enter into that space.”