Investor money waiting at the gates

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Written by Sandeep Singh
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Updated: May 10, 2014 12:14:24 am


A recently released report by global real estate consultancy Cushman & Wakefield, shows that in the first quarter of calendar 2014, private equity investments rose 2.5 times over the same quarter last year

The broader enthusiasm in the market has caught the real estate sector too, going by the slew of investments that are on the upswing.

While foreign institutional investors have increased their exposure to the Indian equity markets by investing a net of Rs 33,394 crore ($5.5 billion) so far this year, private equity investments have also risen during this period. Industry insiders say that interest from private equity players will see a surge once the election verdict throws up a stable government at the Centre.

Having witnessed a slowdown over the last few years, investment activity has picked up as a result of innovation and also because of the evolution of the market.

Investment experts say that other than structured deals, investors can now go for buying out completed assets (operating assets) that are currently available in much larger numbers. They are also focussing on platform transactions (project jointly developed with a local large real estate player) which provide easy exit option.

“Few platform deals have happened and a couple of them are at advance stage and should get announced in a couple of months time,” said Subahoo Chordia, senior vice-president, investment banking at Edelweiss Financial Services. He added that the investor sentiment has also improved as the capital markets regulator is in the process of framing regulations for real estate investment trusts.

A recently released report Cushman & Wakefield (C&W), a global real estate consultancy, shows that in the first quarter of calendar 2014, private equity investments rose by 2.5 times over that in same quarter last year. The investment figure for the quarter ended March 2014 stood at Rs 2,800 crore and was almost 30 per cent higher than that in the previous quarter ended December 2013.

Investments pour in

The C&W report shows that there have been atleast eight private equity deals worth over Rs 2,300 crore in the recent past in the real estate sector spanning the segments of housing, office developments and retail spaces. While four deals have been in Bangalore, two have been in the National Capital Region, and one each in Mumbai and Pune.

This is a sea change from the picture a year ago when these investors stuck with their investments were looking for exits.

“The fluctuation in the rupee, and the weak economy in 2013, had forced some foreign funds to exit the market. However, several new foreign funds have entered the market in recent months as financial markets began to stabilise. Blackstone was among the most active private equity players in the country in 2013, while other significant players included the Xander Group and Red Fort Capital,” said Anshuman Magazine, CMD, CBRE South Asia.

The C&W report has pointed out that the rise has been on account of increasing investments in leased office assets by both foreign and domestic funds on expectations of stable rental yields and attractive capital values.

While sales have been stagnant, developers have sought to attract capital in the sector by offering high coupon rates and fund houses too have tried to mitigate risk by investing through structured deals that guarantee fixed returns.

“A number of fund houses have committed funds towards investments in Indian real estate, this is expected to translate into increasing transactions in the sector, especially in income yielding assets. With expected growth in capital requirements, we see a number of fund houses raising additional capital to invest in the sector,” said Sanjay Dutt, executive MD-South Asia, Cushman & Wakefield.

Are these real investments?

Some experts have questioned whether the increased activity from private equity players points to a changing trend at. While investments are largely coming into ready assets, there are some who distinguish it as real when an investor buys a stake in ongoing projects, which is yet to pick up. Currently, several players have gone for total buyout of projects that are nearing completion.

“There has been a pick up in the number of funds going in for buy-outs of income generating office buildings or ready assets but there is no pick up in pace in funding coming to developers for their ongoing projects,” said Shobhit Agarwal, MD capital markets at JLL India.

But there are green shoots emerging for the sector as the non-banking financial companies (NBFCs) have increased their lending to the real estate sector which had slowed down earlier. “There has been a rise in the size of the loan market and NBFCs have started lending and the volumes have gone up,” said Agarwal.

Future looks bright

Several funds with long-term plans in India are now sitting on the sidelines waiting for the political uncertainty to come to an end, after which the investments are set to flood the realty market. This sentiment would also be compounded by the fact that India remains the top destination among emerging market economies for foreign investments.

Experts say that requirement of capital is large for the sector and therefore if a stable government comes to power there will be an increase in inflow of foreign capital within the industry.

“India is certainly going to be the pick for foreign investors from among the emerging economies and they will start entering one there is political stability,” said Agarwal adding that once the money starts flowing into the ongoing projects, it will be a big boost for the industry that had witnessed a slowdown in terms of the funding of the projects.

While buyouts and structured deals are expected to continue, experts feel that platform deals will reach saturation. “They will stop after some time as there are limited number of developers who can be explored for the same,” said Chordia.

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