FUTURE OF PRIVATE EQUITY INVESTMENTS IN THE INDIAN REAL ESTATE MARKET


Image Source: The Street

INTRODUCTION
The Indian real estate industry is one of the largest sectors in the country. It is an indicator of the health of the Indian economy when the real estate market is sluggish, so is the economy. It accounts for 8 - 9% of the GDP of India. And the industry was the second largest employer in India after agriculture in 2017.
As per the report of Indian Brand Equity Foundation (IBEF) (A trust established by the Department of Commerce, Ministry of Commerce and Industry) “By 2040, real estate market will grow to Rs 65,000 crore (US$ 9.30 billion) from Rs 12,000 crore (US$ 1.72 billion) in 2019. Real estate sector in India is expected to reach a market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017 and contribute 13 percent of the country’s GDP by 2025”
The industry has witnessed a paradigm shift in the last decade, from FDI policy relaxations to introduction of RERA, GST rationalization, Demonetization, Smart Cities, Enactment of Benami Transaction Act, Housing for all by 2022 scheme & the adoption of REITs, etc.

REAL ESTATE FUNDING
The amount of investment required in a real estate project is mammoth & the gestation period in a typical real estate project is more than five years on average, making it necessary that developers have access to long term funding sources.
There are an array of sources by which these real estate projects are funded such as Private Equity Investments, Strategic Partnership, Debt Finance, Mezzanine financing, Public Markets, External Commercial Borrowings, etc. However Private Equity Investments covers the major area of the pie chart of various funding sources.

WHAT IS PRIVATE EQUITY INVESTMENT?
As per Investopedia “Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest  in private companies, or that engage in a buyout of public companies, resulting in the delisting of public equity.”
Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.
A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners (GP), who owns 1 percent of shares and have full liability. The latter is also responsible for executing and operating the investment.


PAST TRENDS OF PE INVESTMENTS
As per the reports of Venture Intelligence & ANAROCK Research, the Indian real estate industry has seen a total inflow of USD 14 Billion from PE investments, between the years 2015 to 2018. In the year 2015, the total inflow was USD 2.8 Billion, which increased to USD 4.1 Billion in the year 2018, thus having a growth rate of approximately 15% annually. Growth in the investment shows the confidence of investors in the Indian real estate market and the strong fundamentals of the market.


Source: IBEF Report, 2020
The real estate market in India is typically divided into these four sub segments:1) Commercial 2) Residential 3) Retail & 4) Others. Over the years the commercial space has become the top preference of PE investors, as it is on the boom because of the growth of co-working spaces & the ever-expanding service sector has increased the demand for office spaces.

DISTRIBUTION OF PE INVESTMETS IN INDIA (2014-2019)
Source: IBEF Report, 2020

DOMINANCE OF OVERSEAS PE INVESTORS
As per the research report of ANAROCK, between 2015 and 2018, the share of foreign PE investors has increased from 88% to 93%. This is the reflection of the rising confidence of foreign PE investors in the Indian real estate market. Some of the prominent PE firms investing in the Indian real estate space are Blackstone, Brookfield, Sequoia Capital, Abu Dhabi Investment Authority, Singapore based Xander group, Maple Tree Investments & GIC, and the Canadian Pension Funds.
As of October 2019, Blackstone has made a total investment of USD 6.6 Billion in the Indian real estate space. Out of which USD 5.2 Billion is invested in the commercial space. Blackstone also played a key role in launching India’s first Real Estate Investment Trust (REIT) along with its developer partner Embassy group.
In 2018 US-based Sequoia Capital invested USD 10 Million in a New Delhi based student accommodation platform Stanza Living.
So far Canadian Alternative Asset Manager Brookfield has made an investment of USD 450 Million in the Indian real estate space. Singapore based Maple Tree Investments also funded major projects of Shapoorji Pallonji Group amounting to USD 350 Million.
Further Ivanhoé Cambridge, the real estate subsidiary of Caisse de depot et placement du Quebec, one of Canada’s biggest pension funds had also announced a strategic co-investment platform with Piramal Enterprises in 2017, to provide long term equity capital to blue-chip residential developers.
Amongst the domestic PE players are, Everstone Capital, Motilal Oswal, HDFC Venture, Kotak Realty, ASK Group, Aditya Birla PE, they pumped in nearly USD 2.4 Billion in the Indian real estate space since 2015, of which nearly 71% went to the housing sector.

SHARE OF DOMESTIC & FOREIGN PRIVATE EQUITY INVESTORS (2015 -2019)


Source: IBEF Report, 2020 Venture Intelligence & ANAROCK Research

THE PRESENT OUTLOOK
The Coronavirus outbreak has shaken almost all the world economies, everything is at standstill. It has disrupted trade & commerce worldwide, thus halting global economic activity significantly. The India Real estate economy was already facing an acute liquidity crisis, as the Indian economy was on a downturn with Fitch & other monetary agencies slashing India’s growth forecast in 2019. Homebuyers across India are deferring their purchases because of the pandemic & liquidity constraints. Globally people are adopting the concept of work from home, which really puts a question mark on the relevance of workspaces in a post-coronavirus world.
The current scenario is that all the real estate projects are at a gridlock. Various research agencies are predicting a near-term halt in the growth of real estate in India. PropTiger.com data shows housing sales in India’s nine major cities declined by 26% in the period between January-March 2020.
According to a report by Knight Frank titled “Investments in Real Estate” The Private Equity investment activity dropped to $238 million, with only 5 deals getting concluded in 2020, till 31st May, a 93% drop in Year to Year comparison. Moreover, international funds reorienting themselves to attractive opportunities in the developed economies on account of drop in valuations due to recession would cast its shadow on the PE investments in Indian real state in 2020.

REVIVAL PILLS
The Central & State governments, the Judiciary, and various regulatory bodies such as MahaRERA, SEBI, RBI are coming up with various revival packages, exemptions, notifications, guidelines in order to stimulate the sector.
The Hon’ble Supreme court of India has extended the Limitation period in all proceedings, w.e.f March 15, 2020, till further order/s. The MahaRERA vide its order dated 2nd April 2020, extended the completion date for the projects expiring on 15th March 2020 for a period of three months and also extended the time limits for all statutory compliances which were due in March/April/May to 30th June, 2020.
Further the RBI has also allowed for a three months moratorium on payment of installments in respect of all term loans outstanding as on March 1, 2020, this will give some relief to the developers and the home buyers. The Repo rate & Reverse repo rates were reduced by 75 bps and 90 bps, respectively. This is going to make credit more attractive and infuse liquidity in the system
On top of it Capital Market watch-dog SEBI has also eased the fundraising process, which would give a push to meet the liquidity crisis.

WHAT LIES AHEAD?
The road ahead seems to be quite blurred as there’s a lot of uncertainty regarding how COVID-19 will further impact the global trade and commerce. It is not known how long the virus will last or if there will be a second wave, how much time it will take to develop an effective vaccine, what will be the loss in economic activity, etc.
World over India has enforced one of the most stringent lockdown measures to combat the virus. This makes the uncertainty in case of India even higher.
With respect to PE, investments are not confined to any particular border, it chases the asset/country offering the highest returns globally. The recession over the world economies has led to a sharp drop in valuations of several companies. This drop is a good opportunity for investors to scout for the gems, which might give them good returns in the post COVID world.

"This article is authored by Mr. Rohan Parikh, you can reach out to him at parikhr95@gmail.com."

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