Although institutional investors poured in more than $4 billion in the Indian real estate sector during 2018, with commercial segment cornering the lion’s share, followed by retail and residential, on an annual basis, private equity (PE) inflows in the sector fell by 9%, a report by real estate consultancy Anarock said.
The commercial office segment witnessed the highest inflows, accounting for a massive 70% share of the total institutional investments in the industry last year at around $2.8 billion.
Retail real estate came in a distant second with 7%, and the residential sector drew the least private equity of $266 million, which is less than 7% of the overall share, the consultancy said in its latest report.
Anarock Capital managing director and chief executive Shobhit Agarwal said, “Currently, funding is a major hurdle for the Indian real estate’s growth prospects, especially post the NBFC crisis. Private equity funding is the best alternative for developers who qualify for it. Despite a decline of 9% in PE inflows in 2018 against the preceding year, 2019 will bring a marked increase in private equity funding because of India’s first REIT listing.”
Commercial realty saw a Y-o-Y growth of 27% in PE investments, from nearly $2.2 billion in 2017 to more than $2.8 billion in 2018, aided by high occupancy levels, relatively lower rentals in dollar terms, quality Grade A assets and high-quality tenants.
Considering the high demand, fund exits have been relatively easier in commercial real estate and with REITs being launched, they will become even easier, Agarwal said.
While the report portrays a somewhat weak picture in terms of decline in PE funding in real estate on an annual basis, it also points out some positive trends that the sector is witnessing.
For instance, even as the number of deals in real estate has been declining since 2015, the average deal size rose by nearly 172% in the last four years, from $47 million in 2015 to $128 million in the previous year.
Interestingly, the top five deals in 2018 alone contributed almost 50% of the total investments during the year. PE investors have become more cautious about selecting and associating with developers. However, once confident, they are making larger investments, Anarock said.
Another notable trend, the consultancy said, is that less than 3 months into 2019, the private equity investment is already touching almost $1 billion, with the majority of it coming through a single deal when Brookfield acquired a portfolio of hotel assets of Leela Ventures for around $570 million recently.
“Also, investors’ interest in long-term real estate plays with preferred developers continues to be visible with more than $500 million of additional platforms getting created in just 2.5 months. As we speak, the REIT offering by Blackstone–Embassy Group is ongoing. If the interest for this new investment platform is as expected, it will open a new chapter in the country’s real estate space,” Anarock noted.