The Indian real estate sector has emerged as one of the favoured investment destination for institutional investors over the last decade, with significantly increased focus in the second half, post the global financial crisis that erupted in late 2008.
With the government initiating a series of reforms, institutional investors, including private equity, sovereign wealth and pension funds, continue to express a healthy appetite for Indian real estate.
While the sector attracted $30 billion of institutional investments between 2008 and 2018, over $20 billion was invested during 2014-2018 alone reflecting the positive impact of reforms, showed a JLL India report.
With the year 2018 coming to an end, institutional Investments in Indian property sector this year is expected to touch $5.5 billion, the decade’s highest level since 2009. As of October end, the sector has recorded investments worth $4.2 billion.
Driving the growth in investments are factors like implementation of transformative policy reforms, stable macro-economic fundamentals, and growing risk appetite of foreign and domestic institutional investors.
“India’s real estate sector is at an inflection point. While the investment scenario improved post the global financial crisis, there has been a surge in institutional investments into the sector since the beginning of the year 2014. The trend suggests that the market offers tremendous growth opportunities to foreign and domestic investors,” said Ramesh Nair, CEO and Country Head, JLL India.
Among different types of institutional investors, private equity investors have contributed 80% of the overall institutional investment in the last decade.
Additionally, an improved confidence of global investors is clearly evident with an increased share of foreign investments at 70% in 2018 as against 31% in 2009.
Commercial real estate segment has emerged as the most favourable asset class for institutional investors with a five-fold increase in capital flows to $8.2 billion in 2014-18 from $1.6 billion in the preceding five year period starting 2009.
Global investors, including CPPIB, Blackstone Group, Singapore’s sovereign fund GIC, Goldman Sachs and Qatar Investment Authority have been investing in Indian realty assets for the past few years. In addition to this, more funds are eyeing investment and alliance opportunities.
In one such instance, private equity major Warburg Pincus is poised to enter into an alliance with developer Runwal Group to invest $1 billion in retail-led mixed-use development across the country.
The emergence of such platform deals with increased focus on affordable housing, retail, industrial and warehousing sectors are the key trends to look forward to in the coming years.
“One of the major drivers for the growing interest of investors in the commercial office space has been the government’s move to bring in progressive modifications in India’s REIT policy in last three years, making it more market friendly. As a result, global investors have invested significant capital in acquiring large office assets for building their REIT portfolios in India,” said Samantak Das, Chief Economist and Head of Research & REIS, JLL India.
In particular, 2017 and 2018 recorded maximum investments of $5.9 billion in the office space. This amounts to 72% of the total investments in the commercial office segment during 2014 to 2018, das highlighted.
Against the backdrop of an ongoing policy overhaul, rising investor confidence, enhanced transparency, gradual recovery in the residential segment, and an increasing demand for grade A commercial office space, Nair believes the investment momentum is only expected to grow manifold from its current levels.
Key policy decisions, which have resulted in change in global investors’ perception of Indian real estate, include implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA), the Benami Transactions (Prohibition) Amendment Act, 2016, infrastructure status to affordable housing projects, demonetisation, interest subvention schemes, relaxation of norms to encourage Real Estate Investment Trust (REIT) listings and implantation of the Goods and Services Tax.
In terms of cities, Mumbai, Delhi NCR and Bengaluru have been the preferred markets accounting for over two-third of institutional investments from 2009 till 2018. With 42% share of investments worth $8.6 billion in 2014-18, Mumbai is clearly ahead of other cities. It is followed by Delhi-NCR and Bengaluru with $4.4billion and $2.6 billion, respectively.
With lending by banks to real estate sector slowing down since 2011-12, the role of Non-Banking Financial Companies (NBFCs) and Housing Finance companies has gained prominence.
Realty sector’s outstanding credit from these entities has tripled to $40.2 billion in 2017-18 from $13.4 billion in 2011-12. In percentage terms, proportion of financing by NBFCs and HFCs has increased to 58% in 2017-18 from 36% in 2011-12.
As far as NBFCs are concerned, developers have preferred to refinance existing loans to reduce interest costs.
During FY2017 and FY2018, an estimated $14.4 billion was disbursed by NBFCs to the real estate sector. On the recent liquidity crisis being faced by NBFCs, JLL notes that, though it is not a systemic risk, the real estate sector will face funding issues in the short-term. However, NBFCs affiliated to large corporate groups have steady asset quality and are likely to honour their short-term liabilities.