July 2015 Issue
In 2014, there was a significant upswing in private equity (PE) investment in the Indian real estate sector. Though the speed of that uptick has not quite been maintained in 2015, the resurgence remains notable.
PE investment in the Indian real estate market declined in the first quarter of 2015 from the last quarter of the previous year – yet Q1 2015 still saw a year on year increase of 85 percent, according to a new report from Cushman & Wakefield. The report – ‘Investment Marketbeat: India Q1 2015’ – notes that PE funds invested around $830m into the Indian real estate space during the first quarter of the year, which was a drop of 5.6 percent from the final quarter of 2014. The total number of deals fell to 16 in Q1 2015, down from 22 in Q4 2014. Foreign funds operating in the Indian real estate space executed five deals during Q1, three less than the previous quarter.
Despite the decline in number of deals, the average deal size during the quarter increased by 30 percent to $52m, up from $39.3m. Of those 16 transactions which closed during the first quarter of 2015, 15 were related to residential assets, with a total value of $441.9m. The remaining deal, valued at $387.9m, was for commercial offices. “The increase in PE in real estate investments during Q1 2015 was due to improved market sentiments and higher investments in residential and commercial office assets, which increased by 158 percent and 68 percent respectively compared to Q1 2014” notes the report.
PE has been drawn to the Indian market of late by the improving macroeconomic conditions and the increasing capital requirements of the Indian real estate sector. Around $3.4bn worth of PE funding has been invested in the commercial office sector since 2011, compared to only $1.1bn between 2008 and 2010. Given the scale of improvement, the report expects the value of the country’s real estate market to reach $180bn by 2020.
“Total deal value in the PE space climbed to a seven-year high of $15.2bn in 2014.”
PE’s interest in India cannot be overlooked. The PE industry’s interest in India has spiked in recent years, with deal sizes increasing tremendously. According to Bain, total deal value in the PE space climbed to a seven-year high of $15.2bn in 2014, and the firm believes that this trend is likely to continue throughout 2015. Real estate and infrastructure development accounted for significant portions of the PE investment over the last 18 months.
Revival
Much of the revival in interest in the Indian real estate space can be credited to prime minister Narendra Modi and his government, which has done a great deal to restore international confidence in the country’s economy. As recently as 2013, the Indian economy was facing a number of threats and challenges, but the Modi government has brought India back onto the international investment scene, both as a commercial investment opportunity and a residential one. A number of notable foreign investors, have increased their interest in leased office assets over the last 12 months. IT parks and IT related special economic zones have proved attractive to international and PE investors, as have residential schemes. The report notes that the zones and IT parks have attracted “significant interest from foreign investors, due to low risk owing to high occupancy levels along with stable rental yields and significant potential for capital value appreciation”.
Residential investments have increased significantly as PE players commit high levels of funding to a space which has struggled with subdued sales and restricted access to funding in recent years.
In the post financial crisis world, however, the vast majority of PE real estate financing deals in India has come in the form of structured debt deals. These deals were primarily debt transactions arranged in a manner that provided assured returns to the investor along with a possible upside, if the deal structure so allowed. The rise in popularity of these types of deals can be attributed to the fact that they provide investors with a very attractive investment option – fully secured and full recourse high-teen guaranteed returns in local currency. As a result, the number of PE funds raised in recent years has not only increased, but has focused primarily on residential investing.
A great deal of the much-needed commercial investment and development will likely be funded by PE in the coming years. Renewed interest and investment in the commercial real estate market is expected in the months and years to come, as the country sees a rise in pre-commitments from large corporations, bolstered by improving macroeconomic conditions. India’s recent economic resurgence has placed the country back on the corporate map; as such, companies and PE firms that wish to capitalise are looking to invest in commercial developments sooner rather than later.
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Richard Summerfield