Decline in private equity inflow into housing segment a cue for investors to stay away
In the past, projects financed by private equity investors were considered safe for investors and home buyers
The slump in residential real estate in India is showing up in less private equity (PE) money flowing to it. PE funding for residential real estate is down 34% year-on-year (y-o-y) in the quarter ending June 2018, but the commercial sector seems to be doing well, according to a joint report released by Cushman & Wakefield and the Confederation of Real Estate Developers’ Associations of India (Credai), an industry lobby. Overall, PE investments in the real estate sector have dipped 22% y-o-y to ₹10,080 crore in the June quarter from ₹12,970 crore in the same quarter in 2017.
While there is continuous increase in investments by PE firms in the office sector, making up for approximately 42% of the net inflow share across the six key sectors, the residential sector is witnessing continuous plunge in PE inflow. PE investors made just 15% of total investments in the residential real estate segment in the June 2018 quarter compared to about 18% in the same quarter in 2017 and 71% in June 2016.
PE investments were an important source of funds for residential real estate developers, but it seems investors are now cautious on this segment. “PE investors are only willing to invest with players who have an established track record of returning money to investors,” said Amit Bhagat, chief executive officer and managing director, ASK Property Investment Advisors. “Over-leveraging of assets with diversion of funds to acquire more land parcels proved disastrous for many developers across the country but more so in the National Capital Region (NCR),” added Bhagat.
While sales are down, banks are reluctant to finance residential housing projects. “With the advent of Real Estate Regulator Authority (RERA) followed by demonetisation, real estate developers, especially for residential segment, are finding it challenging to raise bank finance to meet their working capital requirements among other financing needs,” said Anshul Jain, country head and managing director India, Cushman & Wakefield.
Given that return expectations are low from the residential segment, non-banking financial companies (NBFC) are the only ones financing developers now. “NBFCs are beneficiaries of the existing arbitrage for gap in financing, replacing banks and also offering competition to PE offering structured finance. NBFCs’ cost of capital is lower as compared to return expectation of investors in structured finance private equity. Banks have also found a safe bet in financing NBFCs rather than lending directly to real estate sector,” said Bhagat.
Though there is a fall in PE investment in the residential real estate market, some experts said the fall is only temporary.
“Of the total investments committed over the last more than five years (2013-June 2018) in real estate, the residential segment had a share of 47%, while for office it was 26%. Even though the residential segment still forms a significant share of the total investment, off late investors’ attention towards the office segment (backed by strong leasing momentum) can be attributed to a decline in the quantum of investments towards residential segment in the last couple of years,” said Jain.
The alteration in the share of investments in the residential segment is on account of investors’ focus being divided between other segments, including office. Conducive policy reforms like RERA and infrastructure status for affordable housing will only increase the confidence of institutional investors in this asset class, added Jain.
What should you do
In the past, projects financed by PE investors were considered safe for investors and home buyers. While many supply side stake holders are saying that the market has bottomed out and prices will soon start moving up, it seems even PE investors are not confident about price rise or return from residential real estate market at present.
As an individual investor into real estate, take your cue from PE investors and stay away from residential real estate for investments.
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