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Here's why the world's largest Private Equity firms are investing in Indian real estate

By Finserv MARKETS - Jul 27,2019
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why the world's largest Private Equity firms are investing in Indian real estate

Introduction

The Indian Private Equity landscape has developed significantly over the last 10 years. If we specifically look at private equity investments in Indian Real estate, it brings us to some very encouraging figures. Private equity and debt investments in Indian real estate increased to US$ 4.18 billion in 2017, compared to US$ 3.73 billion 2016. In fact, in the January-March quarter of 2019, Private Equity (PE) investment in the sector touched nearly US$ 1 billion, according to data. Multiple ambitious real estate projects are underway, across commercial spaces, smart cities, retail real estate and residential projects, and PE seems to be a great route for developers to raise the much-needed funding.

On a second look, it is a case of growth attracting growth – this sector is on an upward slide. Real estate contribution to India’s GDP is estimated to increase to about 13 per cent by 2028 The market size of real estate in India is expected to increase at a CAGR of 15.2 per cent during 2008 – 2028 (expected and is estimated to be worth US$ 853 billion by 2028, and US $ 1 trillion by 2030.

Here's why the world's largest Private Equity firms are investing in Indian real estate

Increasingly, both domestic and foreign PE players are responsible for a lion’s share of the total investment in the sector: the value of the investment in commercial real estate segment was at USD$ 4.123 billion in 2018, which was 58% of the total funding in the sector. If we look at the trends more carefully, it looks like the PE firms were infusing money into the segment anyway, and were bolstered by the positive reforms.

Here's why the world's largest Private Equity firms are investing in Indian real estate

Let’s ponder over the ‘why’ behind these trends

As mentioned before, first of all, it is the reforms that are supporting the push. Reduction in the GST for under construction projects in both premium and affordable segments will trigger a cycle: increased demand leading to increased housing sales. PE firms will, therefore, seek to capture a substantial market and upgrade their participation in it.

Novel concepts like co-working, co-living, student housing and senior citizen living, which were practically unheard of till a few years ago, are also drawing the attention of such investors, whether domestic or foreign. These new developments are also strategically positioned in and around hubs, educational institutions and the fulcra of economic activities. PE investors are also expanding their footprint into real estate structured equity/mezzanine funding.

As is clear from the larger picture, India’s real estate sector has undergone and is witnessing a paradigm shift, with the FDI policy relaxations and landmark reforms like Real Estate Regulation Act (RERA), Goods and Services Tax (GST), Insolvency and Bankruptcy Code altering the hitherto unorganized sector into a corporatized and gentrified one with financial discipline. These regulatory changes provide an impetus, and a dovish monetary policy outlook helps. The sector – and especially the residential real estate market – is being uplifted by the foreign and domestic private equity firms. As their investments worth hundreds of millions of dollars are injected into the sector, superior housing is bound to fall into place. Think serviced apartments. Think skyscrapers.

The government is pushing for affordable housing and massive infrastructure augmentation, including significant capital expenditure for roads, railways, development of smaller

airports and smart cities. The cultural trends of co-working and co-living spaces make the commercial market segment buoyant too. For the PE players, the valuations are probably a lot more attractive today than they were four to five years ago. Thus, you will have a plethora of residential spaces to choose from for your next home, including spaces very strategically located within important commercial or financial hubs.

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