Transactions in India’s real estate space might have slowed down over the last two quarters, but the sector has not been overwhelmed by the state of the wider economy. Despite the subdued pre-election economic scenario, in fact, the period observed an increase in private equity activity. Most investments by PE groups were structured debt deals and their preference was for residential projects or well-leased commercial projects. Investors spotted opportunity in fully leased IT parks and SEZs in cities such as Bangalore, Pune and Gurgaon. Land and/or development sites for residential and mixed-use development in the peripheral locations of leading cities also attracted investor attention. Blackstone was among the most active PE players in the country in 2013; and other significant players included the Xander Group and Red Fort Capital.

One of the most significant deals last year saw Blackstone investing approximately Rs. 450 crore for a 50% stake in Panchshil Realty’s SEZ project, Eon Free Zone (leased asset) at Kharadi, Pune. Last yearalso saw IDFC’s real estate investments arm buying out a constructed andleased phase (Phase I) of Pune-based developer, Paranjape Schemes’ SEZ at Hinjewadi, Pune,for INR 460 crore. More recently, Xander hiked its holding in the Tata Group’s public listed retail company, Trent Ltd., and acquired an additional 3% stake for about Rs. 107.4 crore.Meanwhile, the Canada Pension Plan Investment Board (CPPIB) has also announced its intentions to invest in the Indian market; and Piramal Enterprises Ltd. has formed a strategic alliance with CPPIB for providing project-level debt to local developers across the Delhi NCR, Mumbai, Bangalore, Pune and Chennai markets.

With the current liquidity crunch in the market likely to continue awhile, HNI retail investors are looking to buy pre-leased office assets at attractive valuations. The group is currently targeting investment yields upwards of 9%, and is increasingly moving from vacant to leased Grade A office spaces. The other investment trend anticipated for this segment involves rising geographical fungibility due to a lack of quality office spaces across most micro-markets of leading cities in the country. Focus areas with yields upwards of 9% for such investors include the Bandra–Kurla Complex, Andheri and Kurla in Mumbai, and Indiranagar, Whitefield and the Outer Ring Road in Bangalore. Institutional investors, for their part, are expected to increasingly move towards core strategies of investing in leased office space assets in 2014; while developers are more likely to lease out their assets for better valuations, as against their earlier practice of selling vacant assets.

According to CBRE’s recently released Asia Pacific Investor Intentions Survey 2014, which gauges the appetite and outlook of Asia Pacific real estate investors for the rest of the year, a significant majority of investors expect to commit more capital into the Asia Pacific real estate market in 2014 over that in 2013. The Survey 2014 identifies India as one of the priority markets for global real estate investors, particularly among Asian investors. India ranked as the fifth-most attractive investment destination in the APAC region, behind China, Australia and Japan, with long-term growth factors such as the demographic dividend, and rising middle class shielding it from the ongoing volatility in financial markets. The intention to invest in India, therefore, exists; but actual deployment of capital has unfortunately lagged behind (according to the Survey 2014).

Despite indications of strong investment intentions in emerging markets—especially in India—over the last year, there is reason to believe that quite a few foreign investment firms have held back from an operating perspective, because of the difficulty of conducting business in the country.Other clear reasons for this mismatch between investment intentions and actual capital deployment in India have been policy restrictions and an inability to locate the right assets at the right pricing.Long-term prospects for PE investments in India’s realty sector look fairly positive, however, with added focus on more reasonable asset valuations.

Prominent trends in the sector at present have involved large funds like Kotak, ASK and India REITs building diversified portfolios on the one hand; while on the other, a steadily growing tribe of localreal estate funds have been reviving small projects usually discounted by larger, traditional funds, with fast deployment of money and quick exits with reasonable returns. Quite a few niche funds have been investing in affordable housing projects too. Cases in point include the Acumen Fund, a New York-based not-for-profit venture fund, looking to invest in India’s low-income housing space in 2014; the Mumbai-based PE fund, Avenue Venture Real Estate Fund (AVREF), which has tied up with the Pune-based Vastushodh Projects, to invest in the latter’s affordable housing projects; and Brick Eagle Capital Advisory, the dedicated real estate PE investor, which enables affordable housing development by incubating companies to fill gaps in the affordable housing ecosystem.

Meanwhile on the global front, the economy is expected to grow faster, and PE activity is expected to rise as a result of anticipations of accelerated deals, mergers and acquisitions. With global investor interest in BRICS markets and emerging economies set to increase too, clearly some of the BRICS nations, like India, continue to remain the key destinationfor funds and firms opting to grow their businesses off-shore.

Source: Sachin Murdeshwar