PE investments in real estate dip sharply in 2020 as pandemic hits investor activity

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October 16, 2020 1:51 PM

Of the total PE investments in real estate, office segment attracted the largest share of $1,871 million, claiming 81% share, followed by warehousing at 10% and residential with 9%.

In 2020 (YTD), there were 3 deals in the residential sector worth $216 million. The investments were down 67% YoY compared to $659 million during the same period last year.

Hit hard by the COVID-19 pandemic and the resultant economic slowdown, real estate in India has attracted private equity (PE) investments of $2,308 million year to date (YTD) in 2020 (January 1 to September 30, 2020). The value of transactions was lower by 57% compared to the same period last year as the investor activity dropped sharply with only 11 deals getting concluded, according to Knight Frank India.

Of the total PE investments in real estate, office segment attracted the largest share of $1,871 million, claiming 81% share, followed by warehousing at 10% and residential with 9%.

As per the report titled ‘Investments in Real Estate – Trends in PE Investments – Q3 2020’, the PE investments in real estate peaked at $8,837 million in 2018 which had been the best year for PE investments in real estate in the previous decade. In 2019, the investments declined by 23% YoY to $6,792 million. This decline is primarily attributable to the decline in investments in residential and office. While the residential sector has been passing through tumultuous times, a dearth of mature assets has led to a decline in investments in office.

The overall drop in 2020 can be attributed to the COVID-19 pandemic which impacted investor sentiments and the resultant economic slowdown. Of the $2,308 million invested, $1,635 million was due to a single large deal in the office segment.

In 2020 (YTD), there were 3 deals in the residential sector worth $216 million. The investments were down 67% YoY compared to $659 million during the same period last year.

As per the report, residential prices have been stagnant for several years now and have corrected at certain locations. However, the cost of input items for developers have not corrected by the same extent, and has in fact, increased for many items.

For instance, land prices are yet to correct; the cost of labour, cement and steel have gone up; construction charges and approval costs have also increased over the years. On the other hand, the sales velocity has come down compared to the heydays of the earlier period. This has dented the profit margins of developers and lowered the Internal Rate of Return (IRR) from residential projects. The removal of Input Tax Credit (ITC) for input items in the GST regime has reduced the developer margins even further. On account of these factors, investors have refrained from investing in residential projects.

The office sector, however, continues to be the blue-eyed boy for investors due to the strong fundamentals of the India office market. The segment has garnered $15.4 billion of equity investments since 2011. During YTD 2020, the segment garnered 81% share of total PE investments.

Of the $1,871 million of investment in 2020, $1,635 million was part of a single large deal. The PE investments in office segments were down 31% YoY in YTD 2020 compared to $2,725 million during same period last year.

“Despite a slowdown in overall PE investment, therefore, we continue to witness strong investor appetite for rent yielding office assets. The PE investments in office in 2020 may surpass the previous year numbers if the deals in the pipeline are concluded,” says Knight Frank India.

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