PEs don't buy into realty gloom story; investments hit 5-year high

PE funds have put in $2.5 billion across 29 deals in real estate in the H1 of 2017

While residential launches and sales have fallen in the first half of this year, it has not deterred private equity (PE) funds from pouring money into the Indian real estate market.

PE funds have put in $2.5 billion across 29 deals in real estate in the first half (H1) of 2017, which is 61 per cent higher than the corresponding period of 2016, according to data collated by Venture Intelligence. The inflows in H1 of 2017 were the highest amount of funding by PE firms in real estate in the last five years. The same period last year saw PE investments of $1.5 billion across 39 deals in real estate.

Overall, PE funds invested $11.3 billion in the country during H1 2017. Arun Natarajan, founder and chief executive officer of Venture Intelligence, said the shift is happening from domestic to foreign investors and from residential to commercial properties.

"Between 2008 and 2016, most of the deals were done by funds promoted by domestic institutions. But recent deals are done by foreign investors with a bent towards commercial properties, especially warehousing and logistics assets," Natarajan said.

He said two years ago, 100 per cent of the deals were residential. "Now, half of the deals are commercial."

Sunil Rohokale, managing director, ASK Group, said 90 per cent of the money was used to buy ready commercial properties and the rest was used for development of properties. "The market has not felt the larger impact of PE money and developers are still looking for capital," he said.

While the commercial property market has recovered and vacancy levels have touched an all-time low, residential markets are struggling. "With Rera (Real Estate Regulation & Development Act), there is a lot of uncertainty around residential real estate, but the commercial property market is still buoyant and stable. So developers are encashing their investments now," said Ramakrishnan, executive director at Bengaluru-based Embassy group, which raised money from the Ajay Piramal group recently. Hit by demonetisation and Rera compliance, launch of new residential projects in the top eight cities came down by 41 per cent in H1 of 2017, a seven-year low, according to a latest report by Knight Frank. Ahmedabad and the national capital region (NCR) were the worst hit, with launches plummeting 79 per cent and 73 per cent, respectively. Sales volume fell by 11 per cent on a yearly basis, the lowest first-half sales in the past five years, the report said.

Anuj Puri, chairman, Anarock Property Consultants, said he was not surprised to see the H1 numbers of 2017, considering the various changes in real estate after the Narendra Modi-led BJP came to power. "Transparency has increased and more and more investors are considering investments in India. NCR has done well in attracting investors' attention; however, investors largely prefer non-equity investments in residential projects in NCR. The all-round investment scenario might take some time to peak," Puri said. Ajay Jain, executive director-investment banking and head of real estate group at Centrum Capital, said besides last-mile funding requirements, developers are raising money to give an exit to non-banking financial companies or banks. "Developers have realised each project needs to be financed, since, post-Rera, diversion of funds from one project to another project is not possible," Jain said.