Bengaluru: Private equity and debt investments in India’s real estate sector jumped 12% in 2017, led by global investors such as GIC Pte Ltd, Canada Pension Plan Investment Board (CPPIB) and The Xander Group Inc.
However, debt transactions, the mainstay of residential projects, declined as cautious investors stayed away from over-leveraged developers.
With demand for capital high in 2017 as project cash flows remained, 2018 may finally see long-term, equity capital into residential projects without which it will be tough for realty firms to sustain operations in the post-Real Estate (Regulation and Development) Act regime.
Private equity and debt investments in real estate grew to $4.18 billion across 79 transactions in 2017, compared to $3.73 billion across 138 deals in 2016, according to News Corp.’s VCCEdge.
Of these, 31 were equity deals ($2.85 billion) while the remaining 48 ($1.33 billion) were debt transactions, as against 25 ($1.46 billion) and 113 ($2.26 billion) in equity and debt respectively in 2016.
Last year’s single largest transaction saw promoters of India’s biggest developer DLF Ltd selling 33.34% in its rental arm for around Rs8,900 crore to GIC, Singapore’s sovereign wealth fund.
Xander, which invested around Rs4,250 crore in 2017 in office, retail and debt financing, plans to grow these and expand into a few interesting operating platforms.
“For the last 12 months, we have been addressing the India residential opportunity through our debt platform where we believe the risks/returns are more appropriately priced, given the current market situation and the various regulatory changes. As the dust settles and equity investment becomes more appropriately priced for the associated risks, we will pursue the residential opportunity through a new opportunity fund," said Rohan Sikri, senior partner, Xander Investment Management Pte Ltd, the real estate private equity arm of The Xander Group.
With high leverage levels at developers, the sector is now seeking equity, and private equity funds will start introducing equity-type products, said fund managers.
“There is a lot of capital available today but it’s only for select developers and the distinction between good and bad developers is more pronounced. But funds are realizing that they need to take more risks and do equity deals because that’s the need of the hour," said Ambar Maheshwari, chief executive, private equity, Indiabulls Asset Management Co. Ltd.
The warehousing and logistics sector attracted more than $1 billion last year, emerging as the new hot spot for investors. CPPIB made a $500 million commitment to IndoSpace Core, a joint venture with Everstone Group. Ascendas-Singbridge Group bought six warehouses from logistics firm Arshiya for Rs534 crore. LOGOS Group and Assetz Property Group partnered to set up a logistics and warehousing platform to invest around $400 million.
“There is an opportunity for equity deals for the right projects and developers, and those are in steady, annuity income generating space, like office and warehousing, and most large deals have been there," said Sanjay Dutt, chief executive officer, operations and private funds, Ascendas-Singbridge India.
Dutt said the firm almost doubled fund allocation for India in 2017 and that continues this year as well. Both commercial office and the new warehousing vertical would be key focus areas for the firm this year.
The momentum of blockbuster deals in 2017 will gain speed this year, said a research note by property advisory JLL. With short-term disruptions such as demonetisation and the goods and services tax (GST) behind, 2018 maybe the year for investors to consider a strategic entry into India.
“Structured debt funds and NBFCs have serviced residential projects, with refinancing needs being at the forefront with the need to stay afloat. This will continue," said Shashank Jain, partner, transaction services, PwC India.
NBFC is short for non-banking financial company.
“… Only those finance providers who can provide early stage equity, ongoing construction debt and late stage completion finance will be regarded as financiers of choice, while others focusing on one or two verticals within the capital stack risk seeing their market share erode further," said Khushru Jijina, managing director, Piramal Finance Ltd.