Indian REITs: Where They Are Now (And Where They Need to Go)

Shobhit Agarwal, MD & CEO – ANAROCK Capital

With the Indian real estate sector in the throes of a severe liquidity crunch, Real Estate Investment Trusts or REITs offer a funding lifeline to foreign and domestic investors to pump badly-needed money into the market.

The overwhelming response to the launch of India’s first REIT by Embassy Office Parks – and its superlative performance – have propelled India into the league of mature markets of developed nations with a proper REIT structure in place.

Global investors have had their sights set on India’s burgeoning commercial real estate market for some time. With the success of the Blackstone-Embassy REIT, a positive signal has gone out to all global investors to stake their claim.

At the same time, REITs have opened fresh possibilities and new investment avenues for domestic retail investors. The success of REITs in India could have an overarching effect on the entire real estate sector, and could also trickle down to asset classes such as retail and logistics.

Defining REITs and their Benefits

REITs are investment instruments that pool capital from investors to purchase and manage income-yielding real estate assets or mortgage loans and can be traded on major stock exchanges like BSE.

These instruments would also enable banks to free up their balance sheets by reducing loan exposures and creating headroom to finance fresh projects.

REITs are considered viable investment vehicles because of multiple advantages:

  • With a low entry point for investors, it’s easier for many to add commercial real estate to their portfolio at a much lower investment.
  • REITs offer handsome returns with projected ROI pegged between 12-14% in the long term, with minimum risks.
  • These investment instruments are also less volatile than other asset classes such as the stock market, FDs, mutual funds, etc. because regulations maintain that 80% of the REITs listings should be of rent-generating assets.
  • With institutional investors vying to park funds in Grade A office stock across top property markets, the rents for these listed properties is likely to grow.
  • REITs guidelines also direct that 90% of the nett distributable income after tax be distributed to investors at least twice a year.

CRE Developers’ Saviour

REITs couldn’t have come at a better time for Indian commercial real estate developers as they provide them with a viable funding alternative. They will help developers to improve their liquidity by unlocking the value of their assets and raise capital.

Developers are also free to exit the commercial asset and focus on their core task of developing real estate. This option is particularly beneficial for developers facing a cash-crunch, as REITs give them an opportunity to make an exit when the property is fully operational, and reap maximum returns on investments.

The success of the Embassy Parks REIT has given global investors strong reason to increase their stake in multiple commercial assets across the country so that these could be listed under REITs in the future.

Some of these global institutional investors who are eyeing the country’s real estate market via REITs include Japan’s NikkoAm StraitsTrading Asia, US’ North Carolina Fund, Taiwan’s Eastspring Investments, Malaysia’s Hwang Asia Pacific REITs and Infrastructure Fund, and Canada-based Sentry Global.

Retail REITs – Next in Line?

Retail REITs focus on owning and managing retail real estate and can be a viable instrument for mall developers to raise funds. The Indian retail scenario is bound to benefit from REIT funding, but issues like smaller lease tenures and business models must be ironed out before a retail REIT is launched.

In fact, several institutional investors have already bought stakes in malls, while many have funded greenfield assets. As India’s retail sector matures and gets more organized, a retail REIT seems likely in the foreseeable future.

Residential REITs – Imminent or Improbable?

It’s ironic that residential real estate, the sector that is in greatest need of institutional funding, is not included under REITs so far.

This is in contrast to far more developed global markets like Singapore and the US, where residential assets are a part of REITs. In the absence of a sound and inclusive rental policy, India’s REIT environment is simply not ready for residential REITs at this time.

Countries like Singapore and the US have a defined rental policy which makes it easier for them to host residential REITs. However, the recently announced draft Model Tenancy Act, 2019 is a step in the right direction and could make residential REITs a possibility sometime in the future.

The Future of Indian REITs

While an Indian residential REIT may not be imminent, the commercial sector is certainly buzzing with excitement. The Prestige Group is known to have plans to list its first commercial REIT soon and has already started segregating its residential, office, retail and hospitality businesses. The Bengaluru-based developer may also later launch a retail REIT in the near future.

Other players such as RMZ Corp, K Raheja Corp, Godrej Properties and Panchshil Realty are also said to warming up to the idea of launching REITs for their commercial assets.

The success of REITs in India will be based on the benefits it offers to investors. Currently, taxes such as capital gains tax are not conducive to attracting investors in large numbers.

Mature markets like the UK have exempted REITs from income and gains tax on the property rental business. In other countries, there have been exemptions from stamp duty as well.

For India to truly join this elite club of global REITs markets, tax benefits must be offered to make the investment instrument more functional and lucrative in the long run.

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Government Relaxes FDI Norms for the Indian Retail Sector

Shobhit Agarwal, MD & CEO – ANAROCK Capital

The government is on a roll and is making concerted efforts to bring India’s economic growth back on track. In line with the overall demand, the government today relaxed the FDI norms in single-brand retail and expanded the definition of mandatory 30% domestic sourcing norms.

This is excellent news for foreign retailers giants like IKEA and Apple who will now find the Indian market more lucrative to invest and conduct business in.

Many foreign brands have been in a wait-and-watch mode on account of the difficulties so far perceived in meeting the mandated sourcing norms.

With more clarity, many of such players can now make their foray into India to tap into India’s consumption story – and to boost investments here.

Also, the announcement to allow single-brand retailers to start online sales, effectively doing away with the previous condition of first setting up a mandatory brick-and-mortar store, is also commendable.

Massive capital is required for setting up a physical store vis-à-vis online platforms. Now retailers can start online sales without having to open physical stores. This will significantly ease capital pressure on small retailers who are looking to start afresh.

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Real Estate Attracts $2.2 Bn Institutional Funding in H1 2019, 31% Yearly Fall

  • PE & NBFC investments close to USD 2.2 bn in H1 2019 (approx. USD 3.2 bn in H1 2018)
  • Commercial real estate had a 64% share with USD 1.4 bn inflows
  • Private equity alone pumped in USD 2.1 bn in H1 2019 against USD 2.6 bn a year ago
  • Inflows from NBFCs saw a 73% fall – from USD 520 mn in H1 2018 to USD 140 mn in H1 2019
  • MMR saw maximum inflows of USD 530 mn, followed by Pune with nearly USD 250 mn
  • Southern cities Bengaluru, Chennai & Hyderabad collectively attracted over USD 610 mn in H1 2019, NCR saw minimal inflows
  • PE funds optimistic post-elections infused USD 580 mn in Indian real estate in June itself

Shobhit Agarwal, MD & CEO – ANAROCK Capital

A majority government at the Centre is gradually reviving private equity’s confidence in Indian real estate – especially the commercial sector.

ANAROCK research indicates that PE players infused USD 580 mn into Indian real estate in the month of June, immediately after Modi 2.0 took charge.

That said, the general elections predictably cast a shadow on funding into Indian real estate. The total inflows into the real estate sector saw a yearly decline of 31% in H1 2019 – from USD 3.2 bn in H1 2018 to nearly USD 2.2 bn in H1 2019.

Also, the IL&FS default last year and RBI’s tightening norms for NBFC and HFC lending to real estate had a severe impact, to say the least.

Of the total funding into the sector in H1 2019:

  • Private equity inflows accounted for over USD 2.1 bn, while USD 140 mn came in from NBFCs/HFCs
  • In H1 2018, PE funding stood at approx. USD 2.6 bn and funding from NBFCs/HFCs saw a 73% decline – from USD 520 mn in H1 2018 to USD 140 mn in H1 2019
  • Of the total USD 2.2 bn funding in H1 2019, over 89% was equity funding; only 11% was debt. In H1 2018, equity funding had an 83% share while debt stood at 17%.

Mumbai attracted the maximum (24%) of the overall inflows into the sector amounting to USD 530 millionPune followed with nearly USD 250 million coming in from institutional investors – an increase of 97% for Mumbai’s immediate neighbour since H1 2018.

H1 2019 Funding – Sector-wise Breakup

  • Commercial real estate attracted the lion’s share of investments with 64% amounting to over USD 1.4 bn
  • Residential real estate attracted over USD 270 mn
  • Retail real estate attracted USD 260 mn
  • Logistics & warehousing attracted nearly USD 200 mn

Even while caution prevails over the current market dynamics, the incumbent’s government proactive initiatives across sectors will doubtlessly cause more private equity inflows into the real estate sector.

While Indian commercial real estate’s overall attractiveness for institutional funds is now well-established, the residential sector is also likely to become increasingly interesting in the back of the government’s determined push to affordable housing.

Business photo created by rawpixel.com – www.freepik.com

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Project-Level Consolidation On The Rise

Stuck housing projects get a new lease of life

  • More than 90% consolidation in Indian real estate at project-level; only a few (such as Indiabulls) consider exiting realty business altogether
  • After DeMo wiped out fly-by-night and many small developers, liquidity crisis led Big Boys to take up stuck/delayed projects
  • Preferred consolidation models include JVs, alliance, development management contract, land monetization

Shobhit Agarwal, MD & CEO – ANAROCK Capital

While consolidation has been an ongoing phenomenon for some time, recent mergers, acquisitions and joint developments are underscoring this trend like never before.

The Indian residential sector saw a series of disruptions in the last two to three years, with revolutionary reforms like DeMo, RERA and GST remarkably altering the way real estate business is conducted.

A natural by-product of this upheaval was consolidation, with fly-by-night developers completely vanishing and small players merging with big ones.

Just when this consolidation phase seemed to have run its course and the business seemed to have regained an even keel, there was another series of shocks for the sector – the credit squeeze by banks, followed by the NBFC crisis in late 2018.

With previously available financial channels freezing funds to developers, even big players were impacted, and the marketplace was left littered with delayed or stalled projects across cities.

This triggered a new wave of consolidation and diversification, though this time restricted to the level of projects rather than players.

According to ANAROCK data, as many as 5.6 lakh units worth INR 4.5 lakh crore currently are stuck or delayed across the top 7 cities.

A dearth of funds and lack of management capabilities are the main culprits, but stakeholders realized that many obstacles can be overcome by joining forces with stronger peers and leveraging mutual strengths.

More and more cash-starved developers turned to organised and financially-sound players to take over stuck projects by way of JVs, land monetisation and development management contracts across the major cities.

Stressed Developers Scout for Partners

For developers struggling to complete projects, joint ventures (JVs) offer a viable means to overcome financial distress and find synergies.

Developers are exploring alliances to jointly develop projects within revenue-sharing pacts. This trend is most apparent in Mumbai:

  • Rustomjee’s Crown project in Mumbai’s Prabhadevi is being jointly developed by DB Realty and Rustomjee Group. The two companies have entered a development management agreement to execute the 5.75-acre ultra-luxury housing project
  • Sunteck Realty acquired beleaguered developer Orbit Corp’s project Baug-e-Sara in Mumbai’s Malabar Hills. Sunteck is on a land acquisition spree and has also signed a joint development agreement with a local developer to build a 100-crore land parcel in Mumbai’s western suburb Naigon
  • Shapoorji Pallonji Group‘s real estate arm SPREL has partnered with Lokhandwala Infrastructure to jointly develop ‘Minerva’ in Mumbai’s Mahalaxmi. As per the development management agreement, the onus to develop, manage and market the project with be on SPREL
  • In late 2018, Radius Developers signed a development management contract with DB Realty for their Orchid Heights project at Mahalaxmi, Mumbai. Launched more than five years ago, the project has been re-launched in late 2018 as Mahalaxmi One wherein Radius Developers will be marketing and building the remaining apartments in the projects.

Land Monetisation  

Builders are moving away from costly land banking, instead opting to dilute their equity locked in the land. Several realty firms have signed JDAs to monetize their land or to take over the development rights themselves.

This is turning out to be a winning proposition for mid-sized developers who have sizeable land parcels but lack the capability to develop them on their own.

Joining forces with stronger developers with the requisite financial bandwidth and development capability is a very viable way out.

This trend is particularly visible in the National Capital Region (NCR), where developers with land parcels are warming up to partnerships.

  • M3M India plans to partner with multiple developers to develop a 185-acre land parcel on Dwarka Expressway. The player intends to remain the master developer and sign JDAs to earn revenue
  • In Mumbai, Nirmal Lifestyle entered into an agreement with L&T Realty (the real estate development arm of Larsen & Toubro) to jointly develop a nearly 20-acre land bank in the north-central suburb of Mulund. The developer was keen to monetize the company’s land parcels and chose to enter a joint development pact for a share in the revenues, apart from an upfront payment.

Joint Ventures

Collaboration among developers is often the only way to survive in the current scenario. Realty firms in distress seek to sell land or projects they can’t develop to others or to join forces to develop projects.

  • Debt-stressed Nirmal Group has forged alliances with developers Shapoorji Pallonji and Nirmal to jointly develop two projects – Olympia and City of Joy – in Mulund. Both of these projects will be branded jointly. Nirmal Group also had a partnership deal with Godrej Properties to build a residential project in Thane. This has helped them to raise money and reduce their debt.
  • Omkar Realtors & Developers has signed an MoU with Godrej Properties to redevelop a sea-facing slum enclave in Mumbai’s tony Bandra suburb. According to the deal, Omkar will take care of rehabilitating the slum dwellers, while the partner will develop the project.
  • In another case of developers combining synergies, Piramal Realty has signed a development agreement with Omkar to develop a 12-acre project in Mahalaxmi, Mumbai.
  • This trend is also prevalent in the South. Bengaluru-based Ozone Group has signed several development management deals to develop land under its own name.

The Way Ahead

Despite the churn it causes, consolidation in real estate is essentially positive as it results in on-ground project deployment where the alternative is stuck projects. It also creates a more streamlined and customer-friendly landscape.

Institutional funding channels are also keen to enter JVs to support distressed projects that hold potential and offer future value. Private equity funds sensing an opportunity in financially-stressed projects act not just as mere investors but also have a say in project designing, pricing, etc.

For instance, Kotak Realty Fund invested nearly INR 100 crore in a commercial project near Andheri-Kurla Road last year. This helped the builder partly repay his loan and also help complete the project.

For the time being, consolidation of real estate assets is a firm market reality and the sector is likely to witness more joint developments, joint ventures and development management agreements between small developers and established players.

This trend will eventually benefit consumers, as financially weak developers are weeded out and incomplete projects will finally see the light of day.

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PE Funds Inject $1.1 Bn Into Logistics And Warehousing In 2 Yrs

  • Q1 2019 saw nearly USD 200 mn invested into Logistics & Warehousing in cities like Bengaluru, Chennai and Pune
  • Over USD 1.1 bn invested in logistics and warehousing sectors from Q1 2017 – Q1 2019; zero investments in 2015 & 2016
  • Southern cities of Bangalore, Chennai & Hyderabad see maximum inflows, followed by Mumbai & Pune

Shobhit Agarwal, MD & CEO – ANAROCK Capital

Private equity (PE) funds altogether pumped nearly USD 9.7 bn into Indian real estate between Q1 2017 and Q1 2019 – but into more sectors than the ‘usual suspects’ of commercial and residential projects.

Logistics & warehousing is a bright new spot on the Indian real estate heatmap.

Infrastructure status, the multi-modal logistics park policy and implementation of GST has caused private equity firms to take greater interest in logistics and warehousing sector.

Private equity funds altogether pumped in excess of USD 1.1 bn in logistics and warehousing sectors between Q1 2017 to Q1 2019 as against zero investments during 2015 and 2016 combined.

Interestingly, the Southern cities of BengaluruChennai and Hyderabad saw maximum interest by investors, followed by Mumbai and Pune.

The logistics sector had a massive jump-start in the first quarter of 2019 when private equity players pumped in nearly USD 200 mn into cities like BengaluruChennai and Pune.

There is an immense opportunity, backed by the growing demand from e-commerce businesses in the last two years, and the logistics and warehousing sector is consequently upgrading to higher levels of organization.

This shift is visible in various small Grade B and C warehouses converting into large Grade A warehouses equipped with modern facilities – a transformation which has attracted PE entities from US, Canada and Singapore to pump in funds into the sector.

  • Private equity players have pumped over USD 1.1 bn in the warehousing & logistics sector in the last two years
  • The otherwise usual favourite of PE funds – residential real estate – saw equal inflows of USD 1.1 bn during the same period
  • Commercial real estate saw nearly USD 5.7 bn of PE funding in this two-year period

Interest by PE players in logistics and warehousing is currently driven by favourable government policies, strong economic fundamentals and growth in organized retail and e-commerce.

The rapid ramping up of e-commerce activity has caused a corresponding rise in demand logistics and warehousing, in both Tier I and II markets. Increasing use of technology will further boost this sector in India as it has globally.

In fact, technology is the fulcrum that will leverage the Indian logistics growth story in the coming years.

However, as of today, India is still underleveraged due to the fragmented logistics market. Efforts are on to adopt digital technologies, but only a large-scale digital intervention can unlock this sector’s full potential.

All industry stakeholders, from infrastructure and logistics service providers to e-commerce companies and technology firms, must collaborate to transform the logistics sector that supports e-commerce.

Major Deals

Among the major deals, IndoSpace – India’s leading developer of industrial real estate and warehousing facilities – saw maximum inflow in 2017 to the tune of USD 500 mn from Canada-based CPPIB for projects across cities like Bengaluru, Chennai, Pune, Mumbai and Delhi.

This clearly reflects the increasing confidence of private equity investors within the segment.

Top Deals in 2018

  • Warburg Pincus invested nearly USD 180 mn in Embassy Group for a project in Bangalore.
  • Proprium Capital Partners invested nearly USD 100 mn into Musaddilal Projects in Hyderabad.

Top Deals in 2019

  • LOGOS India invested nearly USD 100 mn into Casagrand Distripark in Chennai.
  • Morgan Stanley Real Estate invested nearly USD 50 mn in KSH Infra Ltd in Pune.
  • Embassy Industrial Parks invested nearly USD 50 mn in DRA Projects in Bengaluru.
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PE Inflows In Indian Retail Double To $1.2 bn In 2 Years

Shobhit Agarwal, MD & CEO – ANAROCK Capital

  • From USD 600 mn from 2015-2016, private equity inflows in retail jumped to over USD 1.2 bn between 2017 and 2018
  • Of total USD 1.84 bn inflows in retail in last 4 yrs (2015-2018), Tier 2 & 3 cities attracted nearly 48% funds (of USD 880 mn) against USD 960 mn in Tier 1 cities
  • Top favoured Tier 2 & 3 cities included Amritsar, Ahmedabad, Bhubaneshwar, Chandigarh, Indore & Mohali
  • US-based funds like Blackstone & Goldman Sachs invested more than USD 1 bn between 2015-2018; UAE, Singapore, Canada & Netherlands funds also active
  • Q1 2019 saw only UAE-based Lakeshore invest USD 110 mn in Indian retail

Further liberalization in FDI policies – 51% FDI in multi-brand retail and 100% FDI in single-brand retail under the automatic route (against the previous 49%) – has attracted major global PE funds to double their investments in the Indian retail sector.

As per ANAROCK’s Private Equity in Indian Real Estate report, the total private equity inflows in the Indian retail sector between 2015 to 2018 stood at USD 1.84 bn. Of this, nearly USD 1.2 bn were pumped in between 2017-2018 alone.

US and Canada-based PE funds together invested more than USD 1.13 bn into the retail sector, bestowing their faith on an industry riding on increasing consumerism which is pegged to rise to USD 3,600 bn by 2020.

Tier 2 & 3 cities were high on the radar of the PE investors, who in the last four years infused almost half of their total investments into the retail sector in cities like Amritsar, Ahmedabad, Bhubaneshwar, Chandigarh, Indore and Mohali.

Our report highlights the fact that unlike the commercial office sector, retail is to some extent geography-agnostic because its success depends on the spending power of its target audience.

As a result, shopping malls in Tier 2 & 3 cities have performed as well as, if not better than, their Tier 1 counterparts. This also led to an increase in rentals and profitability and caused PE investors to start considering investment options outside their accustomed Tier 1 geographies.

US-based funds like Blackstone and Goldman Sachs invested more than USD 1 bn funds into the Indian retail sector between 2015 and 2018. Of this, more than USD 700 mn went into Tier 2 & 3 citiesjust USD 300 mn came to cities like Pune and MMR.

Evidently, large PE funds have recognized the potential of smaller cities which continue to have a shortage of organized retail despite the rising disposable income and aspiration-driven consumption appetite being generated there.

PE investors from UAESingapore and Netherland also showed interest in Indian retail during the period and invested close to USD 800 mn into it.

Top 5 Retail PE Deals in Tier 2 & 3 Cities – 2015 – 2018

Investor Investee Deal Size in USDmn Cities
Blackstone Carnival Group 340 Chandigarh
Blackstone Kalani Group 190 Indore
Blackstone Alpha G: Corp 150 Amritsar & Ahmedabad
Xander (VRSA) & APG Sun Apollo &Gumberg Retails 110 Mohali
Blackstone Forum Group 40 Bhubaneshwar

Source: ANAROCK Research

The opportunity that the Indian retail sector holds in store for PE investors is more than evident – as are the geographies they must focus on for optimum returns.

ANAROCK data reveals that around 39 mn sq. ft. of organized retail space is expected to enter the market between 2019-2022. Of this supply, approximately 71% is expected to come up in Tier I cities, and the remaining 29% in Tier 2 & 3 cities.

Ahmedabad, Bhubaneshwar, Ranchi, Kochi, Lucknow, Surat and Amritsar, among others, are the new retail growth hubs where the next chapter of the Indian retail story will play out in the coming years.

In fact, global retailers are now also eyeing cities like Chandigarh, Lucknow and Jaipur, to name a few. There is every reason to expect increasing funding infusions into the retail sector of these cities in the future.

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Entity-Level PE Inflows In Indian Realty Up 17% In Last 2 Years

Shobhit Agarwal, MD & CEO – ANAROCK Capital

Previously, private equity (PE) funds focused on Indian real estate were content with investments at the project level. Now, investors’ preference is now gradually tilting towards entity-level investments.

Data trends from ANAROCK’s recent report Private Equity in Indian Real Estate indicate that the share of entity-level investments is on the rise.

Project Vs Entity-Level – What’s the Difference?

Entity-level investment is an efficient strategy to get a firmer foothold in the real estate market. It allows a private equity investment firm to not only deploy its capital but also gain synergetic skills in the real estate marketplace.

PE firms invariably look for high levels of corporate governance in a real estate development company before deciding to invest in it at an entity level.

Project-level investments take a shorter-term view of capital deployment as they do not necessarily involve partnering with the developer over the long haul.

Rather, a PE firm will invest in a developer’s project, which involves a lower commitment and is, for that reason, a less risky approach to investing in real estate.

Entity-level investments, on the other hand, involve multiple projects and require the forging long-term business alliances.

They require thorough due diligence of the entity’s financials, as opposed to project-level investments where the PE fund will primarily seek to understand the financials of an individual project.

There are well-established benefits to entity-level investments. Once a PE firm and its developer partner have established synergy, more options to deploy further funding opens up.

In the current cash-crunch scenario of the Indian real estate industry, this is significant as longer-term funding can help the developer address long-term issues rather than merely seek short-term solutions.

While entity-level investments by PE players come at the cost of lower returns and higher due diligence requirements, they are of greater overall value for the real estate market in general and developers and PE players in particular.

An increase in entity-level investment alliances implies increasing confidence in developers with high corporate governance scores. As such, they bode well for a market which is making determined strides towards a deeper organization.

Entity-Level Investments Surge

From an overall 22% share in 2015 and 2016, entity-level investments increased to a share of over 39% during 2017 and 2018. In actual value terms:

  • During 2015 and 2016, nearly USD 1.1 bn funds were pumped into Indian real estate at the entity-level
  • In the 2017-2018 period, it was nearly USD 3.3 bn.

Back in 2007, investors were investing all across – largely at the project level – as the picture looked fairly rosy then.

However, post the Lehman Brothers crisis in 2008 and up to 2014, they became more selective. They refocused on select developers with good past track records, and with whom they felt ‘comfortable’.

As in any relationship, a comfort level comprises of various dynamics. With private equity players, it primarily hinges on a developer delivering consistently and factoring in their funding partners’ expectations – not just their own requirements.

Despite this new focus on comfort and credibility, PE investments remained limited largely to the individual project-level. This approach was very much in evidence in the 2015 to 2018 period, wherein approx.

2/3rd of PE investments in Indian real estate was at the project level. Of the total USD 14.01 bn PE funds in Indian real estate over the last four years, more than USD 4.4 bn were infused at the entity level.

A deep dive into data reveals that the focus on the portfolio or entity-level investments picked up momentum in the latter half of the period between 2017 and 2018.

In this period, entity-level private equity inflows almost tripled compared to the previous two years.

Top 3 Entity-level deals between 2015-2018

Investor Investee Deal Size in USD mn
GIC DLF 1,390
Blackstone Indiabulls Real Estate 730
CPPIB Indospace 500

Source: ANAROCK Research

For these plays, institutional investors used a combination of ‘vanilla’ and structured equity for investments into projects.

That said, they found greater comfort with vanilla equity while investing at the entity level, considering the longer-term focus at the entity level, and also the limited availability of structural options while investing at this level.

The major reason for this change is that institutional investors are now looking at long-term partnerships with fruitful returns over a long period, rather than the earlier focus on short-term gains.

Commercial Real Estate Retains the Winning Hand

As anticipated, the commercial office segment accounted for the maximum share with 59% of entity-level investments over the last four years.

  • Entity-level investments in commercial real estate accounted for a mere 13% share in 2015-2016
  • Such investments increased to a share of nearly 74% during 2017 and 2018 (approx. USD 2.5 bn.)
Sectors % share of total USD 1.1 bn entity-level inflows in 2015-16 % share of total USD 3.3 bn entity-level inflows in 2017-18
Commercial 13% 74%
Logistics & Warehousing 0% 17%
Mixed Use 25% 0%
Residential 62% 4%
Retail 0% 5%

Source: ANAROCK Research

What Changed the Game?

The constant talk of these factors has, perhaps, become something of a cliché. Nevertheless, it was primarily the improved transparency brought on by a completely new regulatory approach and policy regime that turned the tide for Indian real estate.

There were also far more favourable macro-economic indicators, including IMF’s forecast of India’s GDP growth rate, at play.

Thanks to these positive market signals, private equity investors once again reposed their faith in the Indian real estate sector -, particularly in commercial real estate.

In fact, the new sunshine sectors of logistics & warehousing, as well as retail real estate, attracted entity-level PE investments.

The residential sector, on the other hand, witnessed a massive decline in entity-level PE inflows – here, investors favoured investments at the project level as this mitigated their risk exposure in a very uncertain market segment.

Other Key Takeaways:

  • In the past four years, out of total USD 4.4 bn entity-level investments in real estate, the commercial segment received a 59% share, followed by residential with an 18% share, logistics & warehousing at 13%, mixed-use projects at 6% and retail at 4%.
  • Massive growth in the commercial sector – from just 13% of a total of USD 1.1 bn funds at the entity level in 2015-2016 to 74% of a total of USD 3.3 bn in 2017-2018.
  • The period between 2017-2018 saw meaningful entity-level investments in the logistics & warehousing sector; entity-level investments in retail also picked up in this period (after a lull in 2015 – 2016).
  • Entity-level investments in residential real estate witnessed a sharp drop – from a 62% share to just 4%.

 Download the full report here –  Private Equity in Indian Real Estate

 

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Singapore Private Equity into Indian Real Estate Triples in Last 2 Years

Shobhit Agarwal, MD & CEO – ANAROCK Capital

  • Singapore funds, over 2 years, comprise 41% share of total PE inflows into Indian real estate at USD 3.5 bn (against USD 1.15 bn in 2015 and 2016 combined)
  • The US and Canada-based PE investors come next with a collective contribution of USD 3.8 bn PE funds in the last 2 years
  • Singapore’s GIC, Ascendas and Xander top PE investors; largely eye southern cities of Bengaluru, Hyderabad and Chennai

Singapore investors are betting big on Indian commercial real estate and other new sunshine sectors, including logistics and warehousing.

Major Singapore-based private equity firms are funnelling billions of dollars into the country’s real estate sector, particularly in South Indian cities.

As per ANAROCK’s recent report Private Equity in Indian Real Estateof the total USD 14.01 bn PE funds into Indian realty between 2015 to 2018, approx. 1/3rd were pumped in by Singapore-based firms alone during the period – the highest among both domestic and foreign investors.

However, of the total PE inflow of USD 1.1 bn in Q1 2019, there were no investments from any of the Singapore-based PE investors such as GIC, Ascendas and Xander.

With funding from banks and NBFCs drying up over the last few years, Indian developers were being forced to explore debt and equity funding from various private equity players.

Singapore investors were on top of the list, followed by PE players from the US and Canada. After establishing a strong base in China, India was their logical next destination of preference.

In fact, with their more patient and long-term outlook, Singapore-based investors and developers have gained a substantial foothold in India’s property market over the last four years.

In in 2015 and 2016, Singapore-based PE players pumped USD 1.15 bn into Indian real estate. This saw a three-fold jump in 2017 and 2018 – to nearly USD 3.5 bn.

Major players including GIC, Ascendas-Singbridge and Xander have been making steady investments into India. However, in recent years they have scaled up their investments and developments across segments.

Besides commercial spaces including office and retail, players like Ascendas are also diversifying their portfolios and eyeing sunshine sectors like logistics and warehousing.

Singapore-based Top PE Investors Approx. PE Funds in India

USD (2015-2018)

GIC 2.5 bn
Ascendas 830 mn
Xander 910 mn

Source: ANAROCK Research

Over the past four years, GIC has invested close to USD 2.5 bn in Indian real estate, mainly in cities like Mumbai, Chennai, Bangalore, Hyderabad and NCR. For Ascendas, the preferred cities have largely been Hyderabad, followed by Chennai and MMR.

Meanwhile, US-based investors pumped in nearly USD 4.0 bn in the same period (2015 to 2018) and more than USD 700 mn in the first three months of 2019.

From the leading US-based private equity players including Blackstone, Goldman Sachs, Hines, Warburg Pincus and Proprium Capital, Blackstone alone infused nearly USD 2.9 bn across Indian cities over the last four years.

A further deep-dive reveals that US-based investors, led by Blackstone, have largely invested in West Indian markets, including Mumbai and Pune.

On the other hand, Singapore-based investors have focused on strengthening their foothold in the South Indian markets of Bengaluru, Hyderabad and Chennai.

PE players from Canada, led by Brookefield, were the third-largest investors into Indian real estate over the last four years, with PE infusions close to USD 2.3 bn. The other major PE player active in India is Canada-based pension fund CPPIB.

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PE Inflows In Residential At 4-Year Low, Commercial At 4-Year High – ANAROCK Report

  • Total private equity inflows in residential at USD 266 mn in 2018 – an 82% decline since 2015
  • Commercial real estate drew the lion’s share with USD 2.8 bn PE funds
  • Average deal size increased by over 170% in 4 years – from USD 47 mn in 2015 to USD 128 mn in 2018
  • Overall real estate sector attracted over USD 4 bn of PE funds in 2018; a decline of 9% against 2017
  • In less than 3 months into 2019, PE equity investment into real estate is close to USD 1 bn

Institutional investors invested more than USD 4 bn funds across the country’s real estate segments in 2018, states ANAROCK Property Consultants‘ latest report ‘Private Equity in Indian Real Estate‘.

The commercial office segment saw the highest inflows, accounting for a massive 70% share of the total institutional investments into the industry in 2018.

Retail real estate came in a distant second with 7%, and the residential sector drew the least private equity among the three sectors, with less than 7% of the overall share.

The report says that out of the total PE inflow of USD 14 bn into the sector in the last four years, 2017 and 2018 collectively saw the maximum investments to the tune of USD 8.6 bn.

Currently, funding is a major hurdle for the Indian real estate’s growth prospects – especially post the NBFC crisis. Private equity funding is the best alternative for developers who qualify for it.

Despite a decline of 9% in PE inflows in 2018 against the preceding year, 2019 will bring a marked increase in private equity funding because of India’s first REIT listing.

From this point onward, commercial real estate – especially Grade A office spaces – will attract considerable investments. Nevertheless, much of the industry’s prospects also hinge on the outcome of the upcoming general elections.

Institutional investors will continue to pump in funds into the real estate industry if they can rely on political stability, proactive policies and a favourable microeconomic environment.

The report further states that despite deal numbers declining since 2015, the average deal size has increased by nearly 172% in the last four years – from USD 47 mn in 2015 to USD 128 mn in 2018.

Interestingly, the top 5 deals in 2018 alone contributed almost 50% of the total investments during the year. PE investors have become more cautious about selecting and associating with developers; however, once confident, they are making larger investments.

Top 5 PE Deals of 2018
Company Investors Amount (US$M) Date City Sector
Shapoorji Pallonji Group Mapletree Investments Pte Ltd.            352 Nov-18 Chennai Commercial
Phoenix Group Xander            350 Oct-18 Hyderabad Commercial
Indiabulls Real Estate Blackstone            730 Mar-18 Mumbai Commercial
Equinox Business Park Brookfield            386 Jan-18 Mumbai Commercial
Phoenix Group Ascendas            204 Jul-18 Hyderabad Commercial

Source: ANAROCK Research

A segment-wise breakdown indicates that commercial realty saw an annual increase of 27% in PE investments – from nearly USD 2.2 bn in 2017 to over USD 2.8 billion in 2018.

High occupancy levels, relatively lower rentals in dollar terms, quality Grade A assets and high-quality tenants are the key reasons for commercial space to draw around 70% of the overall share of the total private equity investments in 2018.

Considering high demand, fund exits have been relatively easier in commercial real estate – and with REITs being launched, they will become even easier.

Q1 2019 PE Update

In less than 3 months into 2019, we have already seen PE equity investment touching almost USD 1 bn, the majority of it coming through a single deal when Brookfield acquired a portfolio of hotel assets of Leela Ventures for USD 570 mn recently.

Also, investors’ interest in long-term real estate plays with preferred developers continues to be visible with more than USD 500 mn of additional platforms getting created in just 2.5 months.

As we speak, the REIT offering by the Blackstone – Embassy Group is ongoing. If the interest for this new investment platform is as expected, it will open a new chapter in the country’s real estate space.

Key Deals in Q1 2019

Investor Investee Asset Class Amt (USD Mn)
Brookfield Hotel Leela Ventures Hotel 573
Hines DLF Office 127
LOGOS India

 

Casagrand Distripark

 

Logistics & Warehousing 98

Source: ANAROCK Research

Other Report Highlights:

  • Between 2016 and 2017, the main Southern cities cumulatively saw just 18% (in 2016) and 17% (in 2017) of the total PE investments. This share increased to 54% in 2018 through a series of investments.
  • The retail real estate sector is riding high on India’s growing consumerism – not just in metros and tier 1 cities but also in tier 2 & 3 cities. Nearly 46% of institutional investments in retail spaces between 2015 and 2018 were made in non-metro cities like Bhubaneshwar, Chandigarh, Indore, Amritsar and Ahmedabad.
  • Due to multiple issues like stalled/delayed projects, the liquidity crunchhigh property values and low sales, the residential real estate sector has been shedding PE investors’ interest. Between 2015 and 2018, equity investments into the sector reduced from 47% to a mere 3%.
  • However, the affordable housing segment is gaining momentum and investors will seek to secure a slice of this increasingly lucrative pie.

Best-performing Cities:

  • At the city-level, Mumbai continued to be the most preferred destination for overall PE investments, seeing nearly 38% of the total capital inflows in 2018
  • Hyderabad witnessed a sudden burst in investments in 2018, attracting more than USD 1.1 bn of private equity – a more than three-fold increase in investments compared to the collective previous three-year period. This growth spurt was largely led by commercial real estate, with the Phoenix Group receiving vast PE infusions through multiple deals.
  • Hyderabad surpassed Bangalore and Chennai, the other two major South Indian cities, in investment inflows.

Going forward in 2019, institutional investors are likely to continue infusing investments into the maturing Indian real estate market, which offers more scope for growth than developed countries with matured real estate markets.

Moreover, strategic policy relaxations to boost the ease of doing business, coupled with the rapidly transformed business environment, will continue to attract private equity to Indian real estate.

Click here to download the report

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What ROI Can One Expect From REITs?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

  • About 50% of India’s total office stock is REITable – up from 30% in 2 years
  • Projected 5-year returns on commercial assets is 14%
  • REITs could further percolate down to other asset classes like retail and logistics

The listing of India’s first REIT by Blackstone-backed Embassy Group has been in the offing for quite some time, but it now it will finally be listed and open for investment on 18 March 2019.

As REITs get officially deployed in India, investors hoping to cash on this new avenue for generous ROI growth seek to understand what exactly is in store for them – and for the real estate market.

As with any other investment platform, REITs have their own nuances and also issues, especially in the Indian context.

Obviously, the industry at large has a lot of skin in the game as REITs promise to be a major inward-facing funnel not only for foreign institutional investments but also considerable individual investments.

Given that the industry is still caught in the prongs of an unrelenting liquidity crunch, there couldn’t be a better time than this for foreign and domestic investors to pump funds into the real estate market via REITs.

Besides perfect timing, the listing will enable India to join the ranks of all mature markets because only such markets have a proper REIT structure in place.

It will open avenues for global investors who have been bullish on Indian commercial real estate but have been waiting for an opportune time. The total of 33 mn. sq. ft. area to be listed by Blackstone-Embassy group is just a fraction of the massive portfolio held by the US firm in India.

If successful, it will help them list more properties under REITs in the future. This will eventually send across a positive signal to all global investors. As for several retail investors back in India, the listing will unveil more robust investment avenues.

Also, depending on its success, REITs could further percolate down to other asset classes namely retail, logistics etc. which will not only bode well for the overall real estate sector in the country but also entice investors to penetrate into other niche segments.

FIIs Gear Up for the REIT Plunge

2018 saw large foreign institutional investors like Japan’s NikkoAm-Straits Trading Asia and US’ North Carolina Fund, among others, receive SEBI approval to invest in India under REITs.

Several FIIs had already ‘conquered’ India’s equity markets in the past, and now it is the turn of the real estate market via REITs.

It is not only the timing that is right, but also the stance that FIIs have assumed for real estate plays in India. Most of them are patient investors focused on stable long-term returns which will hopefully exceed those they could expect in their own countries.

Nevertheless, whether Indian REITs will indeed be an unequivocal blessing to foreign and domestic investors still remains to be seen. As things stand now, India’s REIT environment is not really a faithful emulation of that of developed international markets like Singapore, UK, Canada and Australia.

How India REITs Compare Globally

In those countries, REITs are a market-proven model that has withstood the test of time and produced very attractive returns for their investors.

Globally, REITs have responded quite favourably to the evolving market dynamics. Indian REITs hope to take a cue from their western counterparts by bringing in regulations in line with the globally recognized norms so as to maximize profits for REIT investors here.

In Canada, the average return for REIT investors was around 10% in 2017, while in the UK, it hovered between 8-10%. This average return is on all REITable assets including commercial and residential projects together.

In India, the projected five-year returns on commercial assets is an optimistic 14%, largely because Grade A commercial real estate has been on a protracted winning streak since 2017. Commercial real estate withstood the vagaries of the various reforms much better than the residential asset class.

In the US, smaller investors account for between 25-30% of REIT participation from the previous 50% about a decade ago. In India, we can reasonably start with at least 15-20% of participation by smaller individual investors.

All of this certainly bodes well for both FIIs and smaller investors focused on REITable commercial real estate – a space which has also benefited from the incumbent government’s efforts to improve the ease of doing business in India.

Expected ROI – REITs vs other asset classes

REITs

Source: ANAROCK Research

What Disqualified Residential from India REITs

However, residential real estate, the sector that is in greatest need of institutional funding, is not included under REITs while in developed global markets, residential assets are included under REITs.

This is obviously not without good reasons. Lack of a sound and inclusive rental policy in India is one of the major hurdles for REITs in the residential segment. Countries like Singapore and US have a defined rental policy which makes it easier for them to host residential REITs.

Also, the yields on residential projects in India hover between mere 2-3% in the prime locales here – nowhere near those of developed countries.

In short, low returns coupled with the overall negative hype that has followed the Indian residential sector in recent years have thus clearly negated its candidature for Indian REITs – at least in the foreseeable future.

Another area of difference is the taxation structure currently being proposed for Indian REITs. Like in the more developed countries with successful REIT platforms, India too must offer a logical tax regime with a single point of taxation if they are to rise to globally comparable stature.

Commercial Spaces – Primed and Ready

From a pure industry viewpoint, India’s Grade A commercial real estate sector has certainly proven its resilience and ability to generate attractive returns. This is why NRIs and domestic HNIs have shifted their erstwhile focus from residential properties to commercial real estate.

Nor is this a passing ‘phase’ – commercial leased assets across cities such as Bengaluru, Mumbai, Pune and NCR are seeing steadily mounting interest from occupiers, and therefore also from investors. Demand for Grade A office space has been growing and vacancy levels have been sliding south in prime locales.

ANAROCK data also indicates that while commercial real estate supply across the top 7 cities in 2017 (post the disruptive reformatory changes of DeMo, RERA and GST) declined by 24% over the preceding year, 2018 saw a 21% jump in new commercial supply as against 2017. Office space absorption remained steady with top 7 cities, witnessing an increase of almost 5% in 2017 as against 2016, and a 19% increase in 2018 as compared to 2017.

Data currently suggests that approximately 50% of the total office stock in India can qualify for REITs – a definite improvement over the 30% two years ago. Clearly, the market is gearing up for the launch of REITs by developing investable commercial assets.

At the end of the day, the success of Indian REITs will be basis growth prospects of a market that is still maturing, unlike developed countries (including in the Asia Pacific region) which are already mature. India is currently seeing a lot of new construction, so the average age of office buildings is lower than in cities in Australia or even Hong Kong.

Endnote – Cause for Caution

Once REITs become an on-ground reality, the market must remain vigilant. There could be a major issue for Indian REITs if the supply of investment-grade office spaces does not keep pace with demand. If it doesn’t, we will see an asset bubble form in the short-to-mid-term.

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