Even as both housing sales and demand are down, alternate investment funds are getting active in a muted market to fill in funding gaps. Experts point out that most funds are betting on the long-term investment potential in the sector rather than short-term exit horizons.
High prices, a dampener
While a Knight Frank report notes that housing sales had dropped by 17 per cent across six cities with NCR seeing the sharpest drop in home sales, a CBRE report also doesn’t paint a rosy picture of the sector, stating that residential sales declined by approximately 30 per cent y-o-y by the end of 2014 in the seven leading cities of the country, largely due to high price points, sticky interest rates and cautious buyer sentiments.
The general slackness in residential sales was primarily triggered by the Affordability Index sliding in certain cities, it added.
Real estate funds are, however, bullish on the long-term potential.
Indiabulls Asset Management Company, which recently entered the alternative investment space through Indiabulls Real Estate Fund, said it is targeting investments in residential projects in five cities.
The proposed target fund size is ?500 crore.
Ambar Maheshwari, CEO — Private Equity Fund, Indiabulls, said, “The recent announcement of interest rate cut is expected to boost housing demand and will help in reviving the real estate market sentiments. The various initiatives taken by the government such as relaxation of FDI norms in the construction sector, ordinance on the Land Acquisition Act and the legislation awaiting parliamentary approval on the Real Estate (Development and Regulation) Bill have the potential to spur new project developments in the real estate space.”
Ventures, credit solutions
Vatika Group and GIC also established two joint ventures for residential projects in Gurgaon while KKR, another global investment firm also recently announced it has established a non-banking financial company to provide structured credit solutions to the real estate sector.
Ralph Rosenberg, Global Head, KKR Real Estate, said in a statement, “While many lenders provide debt to this sector, there is a need for solution-oriented, non-dilutive capital for property developers. We intend to fill that gap and contribute to the continued development of India’s residential and commercial real estate sectors.”
During 2014, KKR initiated the real estate business in India by structuring and participating in three transactions with an aggregate amount of approximately $190 million.
India Ratings & Research, however, has maintained a negative to stable outlook on the real estate sector for FY16.
Credit metrics to drop
Ind-Ra says the credit metrics of real estate companies will continue to deteriorate in the year, as demand will remain subdued amid high property prices, even while inventory is being built-up using bank funding. The sales of residential units are not likely to recover during FY16.
India Ratings said transactions continue in the residential segment though investors are now using structures such as debt or debt-like hybrid instruments and bulk unit purchases, instead of equity investments to better secure their interests. The use of debt/hybrid instruments is a concern, as it only shifts the funding gap to the redemption date with high funding costs. However, for AIFs, a no pass-through status is still a cause for concern.