PE funds also known as Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts. Capital is global, whereas real estate is regional. The interplay of global capital in the local real estate market has never been more visible. Despite the pandemic, we have seen increased participation and interest from overseas investors in the Indian real estate sector.
Private equity (PE Funds) is money raised to fund a company through private sources rather than by issuing shares through an initial public offering (IPO) called public equity.In recent years, Indian investors have increased despite numerous rules, regulations, and shocks in the economy.
Assets such as office space, stressed loans, impact housing, warehousing, and data centers will likely change the paradigm.
The real estate market experienced a surge in the previous decade. The first-ever regulator (RERA) took effect, restoring buyer confidence in a sector plagued by a trust deficit. As well as the AAA-rated bond default, a liquidity crisis affected nonbanking financial companies (NBFCs) this year.
Two Singapore-listed office REITs have grown by 48 million square feet from 2010 to 2020. Consolidation and growth enabled offshore capital to develop warehouses under the Goods and Services Tax Act of 2017.
Setting the stage for global investors
Following an initial surge, a liquidity crisis followed in 2018 and a global pandemic in 2020. This is the scene as we begin a new decade in 2021. PE funds are pools of capital available for investment in companies globally that represent an opportunity for a high rate of return.
The new decade has seen a significant reduction in NBFCs’ exposure to real estate debt. This has had a direct impact on residential development and has started a consolidation process in the industry. A decrease of Rs 130,000 crore in exposure to real estate is projected by December 2020. Despite the drop in office demand in India, it will rise as COVID-19 unfolds in its second wave by 2020.
The Indian real estate market was undercapitalized and fueled by NBFC debt. COVID-19 and the suspension of NBFC debt have opened up opportunities to offshore investors.
Savills India report
Savills India reports that all foreign institutions invested in Indian real estate in the first quarter of 2021. Residential properties (Rs 56.7) and commercial assets (Rs 78.3 billion) were both purchased.
Due to the obvious stress in the loan books and the Insolvency and Bankruptcy Act of 2016, global Special Situations/NPL specialists from firms such as Oaktree, Fallaron, Bain Capital, SSG ARES, and others have been able to allocate over USD 2 billion for the purchase of loan books from NBFCs since 2020.
In recent months, India-based PE Funds managers such as Kotak Realty Advisors, IIFL, Nippon India Alternative Investments, KKR, and DMI have received commitments from offshore investors to invest in structured debt instruments. ADIA, Blackstone, Brookfield, GIC, Capitaland, Mapletree, and other large global investment managers and investors have also continued to make record investments in the office sector.
In recent years, investors such as Ivanhoe Cambridge, CPPIB, Mertiz of Korea, Sumitomo of Japan, Keppel Land of Singapore, APG of the Netherlands, and Allianz of Germany have made new commitments in the Indian real estate sector across strategies.
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Will more global investors continue to participate in Indian real estate?
In theory, Indian real estate across products offers one of the best risk-adjusted returns in the world. Foreign institutional investors, including Blackstone, Capital, and GIC, have been consistently performing well in the core assets space in India.This has reaffirmed global capital’s confidence in Indian real estate.
Furthermore, global funds have continued to monitor the Indian residential market, which has been transforming as a result of various government reforms such as the implementation of the Real Estate Regulation and Development Act (RERA) and the Benami Property Act, which have improved transparency and accountability in the sector.
While global investors have generally preferred the office segment, residential real estate has recently received a fair share of investment as well. More commitments will be made as data on the recovery of the residential sector and good returns for these new investors becomes available.
With sales in the mid-income segment continuing to rise and the country’s inherent demand for affordable housing remaining strong, foreign institutional firms are closely monitoring this space as a potential long-term investment opportunity.
IFC, REAL, CDC, ADIA, and others have already expressed interest in affordable housing, which has room for growth. Investing equity funds should increase as affordable housing becomes more institutionalized and scalable from an investment standpoint.
Another important factor is the massive amount of dry powder allocated by global investors for Asian markets. Data show that funds dedicated to the Asian real estate market have only grown over the last five years.
By 2020, Asia as a whole will have received USD 439 billion in dry powder. More global investors are likely to enter the sector due to its increased activity and strong potential. By 2020, Bain & Company estimates that private equity and venture capital investment in India will reach $45.1 billion.
Asia and other global investors will invest increasingly in Indian real estate over the next decade. The year 2019 was a record year for private equity in India.
Our estimates suggest that transactions worth Rs 30,000 to 40,000 crore will take place between 2021 and 2022. Newer foreign investors will also arrive in India in 2022.
Even as the sector faced several challenges, global investors continued to invest in India and increase their allocations. Over the next decade, investors will demand more sustainable platforms, leading to a paradigm shift in supply.
For the first time, Korean and Japanese investors have entered the Indian real estate market. These are highly liquid economies that have traditionally exported a large amount of capital for real estate around the world. As Indian real estate continues to grow, more global investors will participate across strategies, sectors, and products.