MUMBAI:Global real estate consultancy, Cushman & Wakefield’s latest report on private equity (PE) investments in real estate, revealed that total inflows from private equity funds in the real estate sector for 2013 was recorded at Rs 7,000 crores (USD 1.2 billion), an increase of 13 per cent as compared to 2012 (Rs 6,200 crores / USD 1.1 billion). Overall private equity investments across sectors in India have also increased by 11 per cent from USD 9.49 billion in 2012 to USD10.5 billion in 2013. The increase in private equity inflows was primarily due to rising investments in residential assets and other sectors like retail and hospitality. While the numbers of deals have increased to 40 in 2013, compared to 34 in 2012, the average deal size has declined marginally and was approximately Rs 175 crores (USD 28 million). Given the difficult economic conditions, developers are finding it increasingly difficult to raise capital through traditional sources and are opting for alternate sources.
The total Foreign Direct Investment (FDI) inflow in construction development for the third quarter of 2013, was noted at Rs 3,200 crores (USD 520 million), which is the highest quarterly investment since Q3 2009. FDI inflow for the first three quarters of 2013 in construction development was Rs 5,500 crores (USD 900 million), a 25 per cent increase from the same period in 2012. Contribution to the overall FDI by the construction development sector was comparatively higher at 9 per cent in Q3 2013, compared to 3-4 per cent in the first two quarters. SEBI has also announced draft regulations for REITs in the country; the move will help organised investments in non-residential developments. Once implemented, REITs will broaden the real estate market and increase the influx of funds into organised real estate.
The GDP growth rate for FY 2014, is expected to be in the range of 5.5-6.2 per cent; considering the reducing fiscal deficit and expectations of dip in inflation, the GDP growth is expected to pick up post elections. Inflation has also shown the first sign of a decline, which will reduce pressures on interest rates. With interest rates stable, both, the Nifty and the BSE’s realty index, witnessed appreciation in the last quarter of 2013. The realty index grew by approximately 24 per cent in Q4 2013. Overall, net-absorption in the commercial office sector has been lower in 2013; primarily due to high relocation and consolidation activity with occupiers moving to better quality, larger and cheaper spaces in the suburban and peripheral locations. This trend suggests that Grade A developments located in these markets have a high potential to provide stable yields in the coming years.
Commenting on the report, Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield, said, “A number of large global investors, including a number of sovereign funds, have taken the first move by partnering with successful local investors and developers for investing in the Indian real estate market. This is expected to result in high transaction activity, especially in income yielding commercial office assets during 2014.” The residential asset class continues to provide tremendous potential for growth in the coming years. With housing requirements growing across cities and funds investing in the asset class primarily in the form of NCDs providing fixed returns, investments in the right project have the potential to yield healthy returns.
Private equity investments in real estate (PERE)
While one transaction each in the retail and hospitality sectors, was witnessed in 2013 in Pune and Bengaluru, 2012 had no transactions being executed in these sectors. Despite slower growth in the economy, interest from both, foreign and domestic funds, in commercial office income yielding assets, as well residential assets through structured deals providing fixed returns, was noted. With increasing commitments from foreign funds, investments in commercial sectors are expected to increase in 2014.
Real estate funds have also been very successful in raising funds, from both, domestic and international investors, which are likely to be deployed in 2014 and could result in high investments especially in the commercial office sectors. Approximately, 77 per cent of the overall investments during the year were witnessed during the second half. The total value of investments in the commercial office segment for 2013, was recorded at approximately Rs 2,500 crores (USD 400 million), which is a decline of 23 per cent compared to 2012. Although the sector has had a lower contribution to overall investments at 35 per cent in 2013, compared to 47 and 52 per cent in 2011 and 2012 respectively, investor interests in the asset class remain high. A number of foreign investors have committed investments towards funds targeting commercial office assets, thus, transactions in this sector, are expected to increase in 2014.
Considering the attractive valuations of assets, stable expected yields and growing demand for space, investors are actively evaluating prime office assets, across top cities. There is a clear preference for investments in leased office spaces with over Rs 8,350 crores (USD 1.6 billion) invested in the segment since 2011. The total value of investments in the residential segment for 2013 was recorded at Rs 4,050 crores (USD 650 million), an increase of 42 per cent compared to 2012 levels. The sheer size of the residential sector has always led to the asset class contributing significantly to overall investments over the years. Low demand for residential units remains a challenge for the sector with launches declining by 13 per cent in 2013. The sector contributed 58 per cent to overall investments in 2013, compared to 42-46 per cent in 2011 and 2012. Total number of deals in 2013 had also increased to 35 from 25 each year in 2011 and 2012. Average deal size in the residential sector has remained stable at approximately Rs 116 crores (USD 19 million).
Both, Pune and NCR, witnessed an increase in transaction volume in 2013. Overall investments in Pune were Rs 1,460 crores, recording an increase of over four times from 2012, driven primarily by investments in leased office assets. Transaction volume for NCR in 2013 was more than double that of 2012 at approximately Rs 1,650 crores (USD 260 million), all of which was in the residential asset class. Mumbai witnessed a decline of approximately 15 per cent in investments for 2013, to Rs 1,100 crores (USD 180 million). However, investment activity in the city is expected to increase with a few large deals in office assets being currently in the pipeline.