PE funds open a new era in India’s real estate sector

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The real estate sector in India historically never had industry status, making it difficult for companies to have easy access to finances from banks and other institutions to fuel their projects. This invariably prevented companies from completing construction projects on time; a major disadvantage as consumers across India expect delivery of projects on schedule, be it commercial, residential or retail.

Year 2016 marks a new beginning for Asia’s third largest real estate sector; a 40 per cent increase marked private equity investment, at Rs. 3840 crores as compared to the corresponding quarter last year, most of it being foreign investment, brought on by the relaxation in foreign direct investment norms for the construction sector. The news of this increase brought much cheer to the cash starved real estate developers across the country.

The first quarter of 2016 recorded a 35 per cent growth in foreign investment compared to the same last year. Foreign investment also accounted for around 64 per cent of the total investment made during the first quarter.

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Number of deals closed

The total number of deals closed during the first quarter increased by 13 per cent to 17 per cent from 15 per cent in the corresponding quarter of 2015. The average deal size also increased to Rs. 2.3 billion, which is 23 per cent over the first quarter of 2015, according to Cushman & Wakefield’s latest report on ‘Private equity investments in Real Estate’, released in Bengaluru on Thursday. The first quarter of 2016 saw over 48 per cent share of total investment activity focused on the residential sector at Rs. 1870 crore in investments.

The report also pointed to majority of investments during the quarter to be in the western region (38 per cent), followed closely by the South (36 per cent), and the North (26 per cent). The largest investment of the quarter in the form of structured debt of Rs. 500 crore was noted in Mumbai by IIFL Group to Ariisto Realtors.

According to Om Ahuja, CEO, Residential at Brigade Group, the residential segment weighs over 80 per cent of share in terms of user demand and money circulation. “In the market where demand is catching up with supply, and developers are looking for equity and debt participation, PE players are finding good traction from developers who look at options that can help them bridge the gap,” he said.

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Large foreign funds

Large foreign Private Equity funds such as Blackstone, GIC and Xander to name a few have been diversifying their investment portfolio in India and have been increasing their exposure to retail, mixed-use and hospitality sectors apart from investing in commercial and residential sectors. With India being the only large economy in the world witnessing the highest GDP growth rate on the back of favourable macro-economic factors such as controlled inflation and declining interest rate regime, it is not surprising that the interest of foreign investors has increased in the country.

Speaking on the fund flow, Harish S N, Director – Operations at Vaishnavi Group added, “It would positively impact overall growth and help stabilize uncertain market sentiments. This will also bring in the much needed capital for completion of projects. Further, the equity format will help industry to stabilize.”

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The structured debt strategy that is suited for investments in residential assets, offering high yield secured returns has contributed significantly to driving funds to be invested primarily in residential assets. This year recorded 8 per cent increase in investments made via the structured debt strategy compared to previous year, from 71 per cent to 79 per cent.

Observing the developments, Suresh Hari, Secretary, CREDAI Bengaluru, commented, “The increased inflow across all asset class is a sure indication of upswing in demand. Due to global slowdown and oil price slide, the flow had reduced couple of years back. Last year saw the trend reversing with increased inflow. New launches across all classes are expected during second and third quarter of this year. Increases in absorption will enable stabilization of price.” – PRNewswire.

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