Institutional investors comprising a clutch of leading private equity (PE) funds, sovereign wealth funds (SWF), pension funds and NBFCs have invested $7.1 billion in the real estate sector during 2016, up from $5.3 billion in 2013, a 34% increase in three years.
Institutional investors comprising a clutch of leading private equity (PE) funds, sovereign wealth funds (SWF), pension funds and NBFCs have invested $7.1 billion in the real estate sector during 2016, up from $5.3 billion in 2013, a 34% increase in three years. As more traditional methods of fund-raising have recently taken a backseat, these investors now account for 85% of the total investment, up from 32% in 2013, an KPMG report said. PE funds and NBFCs lent $4.6 billion during the year whereas banks extended $1.3 billion of credit, three times less than the institutional community.
In contrast, back in 2013, PE funds and NBFCs had extended loans of $0.9 billion and banks did much of the heavy lifting, lending $4.4 billion to the sector. “The longstanding forms of raising capital have all dried up; whether it is pre-sales, operating cash flow, bank funding or the public markets, and AIFs and NBFCs have largely replaced them,” said Dev Santani, head of residential financing, Brookfield Asset Management.
Interestingly, Brookfield Asset Management, which funds income generating assets across the world has made an exception with financing the domestic housing market. “On the long term, the potential of the residential piece is undeniable,” Santani said. Data show that institutional funds favour the commercial or income-generating segments far more than housing at this point. The office sector, along with retail, warehousing and mixed use developments, constitutes more than 70% of the institutional funding, whereas housing comprised 23%.
“For residential projects, PE funds have return expectation in excess of 22%, which is not sustainable and will have to be moderated or transitioned to pure equity,” said Ashish Raheja, managing director of Mumbai-based Raheja Universal. The yield expectation for commercial buildings, on the other hand, is around 9%, he said. The average deal size has more than doubled to $111 million from less than $50 million, the report enumerated. Last year, there were two deals worth more than $2 billion. As data pointed out, much of these deals were inked in the commercial sector and the residential space is far more underserved.
However, the spurt in lending hinges heavily on a few big-ticket deals such as the mega $1.8-billion deal signed between GIC and DLF, the $500-million deal between CPPIB and Everstone and another $300-million office transaction between Blackstone and K Raheja Corporation.