By Shobhit Agarwal
In 2016 and 1Q2017, residential projects (including townships) across India attracted an investment of more than Rs 26,000 crore. Commercial projects (including IT), on the other hand, got almost half of this amount at slightly more than Rs 13,600 crore. Land attracted 2.5% of the overall investment at Rs 1,065 crore, while retail could attract only 2% or Rs 870 crore due to the lack of quality mall supply. These investment figures are a combination of debt and equity.
Only in 2014 did investment in the office asset class go past the corresponding figure for residential. In all the other years from 2010 to 2016, residential has been the preferred asset class for both institutional and private equity (PE) investors. Interestingly, equity flows have reduced in the residential sector in the last four-five years and made way for largely debt and structured instruments.
The relative slowdown that this asset class has seen over the past three-four years has made investors somewhat conservative and made them turn to construction debt, last mile funding and bundling receivables to ensure that their investments are protected against the lien of the asset. On the other hand, equity flows in the commercial asset class turned stronger, indicating that large investors are keen to look at equity positions, although the right asset remains a key consideration.
The increasing share of equity financing is a key indicator that investors are looking to become project partners and points towards their strong positive sentiments for commercial assets. A major consideration in recent times for commercial assets has also been the impending launch of REITs (real estate investment trusts) in India. It remains to be seen if REITs will eventually change these sectoral inflows in the years to come.
What’s been happening so far?
Immediately prior to the global financial crisis (GFC) in 2007-08, the office market was blazing with healthy leasing transactions and bustling construction activity. However, all this traction came to a virtual standstill as the GFC erupted, leading to a host of unfinished buildings and a perceptible lack of space demand. Consequently, there was a sharp decline in office market rents and capital values over the subsequent periods.
Even before the office sector began to come out of the woods and display some green shoots of recovery in 2011, the residential sector had already picked up the slack and was driving the industry forward. Increase in new project launches, sales and price appreciation became the norm and there was enhanced investor activity as well. This asset class became the darling of both institutional and private equity investors who were looking to make good their losses from the office asset class.
Some strategic investors, however, realized the growth potential that the office asset class had in the long-term in India, and that the lull was a temporary one as occupier activity would again emerge stronger when India regained its edge as a preferred destination for back-offices, high-end software development firms and financial services. These investors banked on the lower capital values and high yields for rent-yielding assets in 2010 and its upside potential.
(The author is Managing Director – Capital Markets & International Director, JLL India)