Total Real Estate Loan Equals $93 Bn, Over 62% Completely Stress-Free: ANAROCK

  • Another 22% under pressure but with high scope for resolution and certainty on principal recovery
  • Merely USD 14 bn worth loans under ‘severe’ stress
  • NBFCs & HFCs together account for 66% total loans while banks consist 34%
  • Of the total, Grade A builders received over $65 bn worth loans, followed by $27 bn to Grade B & mere $1 bn to Grade C developers
  • At least 72% of total lending to Grade A developers is completely safe while a large portion to Grade B & C developers needs strict monitoring
  • In ‘real value’ terms, overall stressed loan amount in Indian real estate still minuscule compared to other major sectors like telecom and steel where default by one company alone equals sizable portion of stress in entire real estate

Mumbai, 2nd December 2019: Over 62% or approx. USD 58 bn of the total loan advances (USD 93 bn) to Indian real estate by banks and NBFCs/HFCs is currently completely stress-free reveals a study by ANAROCK Capital.

Another 22% (approx. USD 21) bn is under some pressure but can potentially be resolved. In fact, the stress on this segment is largely on recovery of interest and not on the principal amount.

USD 14 bn (or merely 16%) of overall lending to Indian real estate is under ‘severe’ stress, meaning that there has been high leveraging by the concerned developers who have either limited or extremely poor visibility of debt servicing due to a combination of factors.

Shobhit AgarwalShobhit Agarwal, MD & CEO – ANAROCK Capital says, “The ‘stress’ loan amount in real estate is not as bad as seen in other major sectors like telecom and steel. For instance, the entire ‘severe stressed’ loan value in real estate is spread across more than 50 developers. In the telecom or steel industries, default by a single company alone equals a sizable portion of the overall stress in the real estate sector. Also, every real estate loan is backed by hard security, which is anywhere between 1.5 times to 2 times. Even if the loan is NPA, there is enough security for the lenders to get a significant portion of their money back. Even if defaulting developers decide to sell their real estate at a discount, there is enough margin for them to pay back.”

Meanwhile, HFCs accounted for the largest share of total realty loans equalling 38%, followed by banks which comprised nearly 34% share while NBFCs have 28% (including loans given under trusteeships).

Of these, banks and HFCs are much better placed with 70% and 65% of their lending book in a comfortable position. However, it also comes as no surprise that nearly 58% of the total NBFC lending is on a watchlist.

“In retrospect, there has been continuous shrinkage of lending to Indian real estate in recent years by both banks and NBFCs/HFCs amidst non-repayment of some loan dues and NBFC crisis post the IL&FS default,” says Agarwal.

“One prime reason was that sluggish residential sales over the last few years completely dried up cash flows for many developers, resulting in unsold inventory pile-up and, thus, their inability to service their loans. Moreover, some developers have even filed for bankruptcy in the backdrop of stricter regulatory norms under RERA.”

However, with both banks and NBFCs/HFCs now doing their due diligence before giving loans to developers, the situation is gradually getting ironed out. Nearly 84% of the overall loan amount has little or no stress at all.

Going forward, residential sales are likely to pick up due to multiple measures being taken up by the government to relieve the sector. This fact itself will help developers to repay their loan dues.

Realty Loans Breakdown: Builder-Type Wise

On further analysis of the overall realty loans with respect to builder-type, it emerges that out of the total USD 93 bn realty loans, Grade A builders received over $65 bn loan advances, followed by $27 bn to Grade B players – and a mere $1 bn to Grade C developers.

This presents a relatively safe outlook because more than 72% of the loans given to Grade A builders is safe and under no stress.

On the other hand, a high amount of realty loans to Grade B & C developers needs strict monitoring. Nearly 28% of the loans given to Grade B developers is under ‘severe’ stress while for Grade C developers it is over 19%. However, this collectively equals to less than mere USD 8 bn of overall stressed loan.

Grade A developers are players that are currently active, with an excellent execution track record and having till date developed real estate in excess of 3 mn sq. ft.

Grade B developers include those with an established execution track record having a developable area between 1 mn sq. ft. and 3 mn sq. ft. and are currently active. This category also includes players with an excellent past execution track record but are currently largely inactive

Grade C comprises of players with less than 1 mn sq. ft. developable area.

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$14 Bn Foreign PE Flows To Indian Real Estate In 5 Years, 63% In Commercial RE

  • Domestic PE funds invested just USD 2.4 bn in this period – 71% in residential, 25% in commercial RE
  • Another USD 1.6 bn pumped in jointly by foreign funds and domestic developers/investors
  • Foreign PE inflows into residential space comprised an 11% share – approx. USD 1.5 bn
  • The retail sector attracted USD 1.7 Bn of foreign PE, comprising a 12% share
  • Top foreign commercial real estate backers include US-based Blackstone, Canada’s Brookfield, Singapore’s GIC, Ascendas and Xander; residential investors included Brookfield, GIC, Equis Funds and Warburg Pincus
  • Top domestic funds include Motilal Oswal, HDFC Venture, Kotak Realty, ASK Group and Aditya Birla PE

Shobhit Agarwal, MD & CEO – ANAROCK Capital

Indian real estate attracted nearly USD 14 bn of foreign private equity (PE) between 2015 and Q3 2019, says latest ANAROCK data. 63% (approx. USD 8.8 bn) of the total foreign investments backed commercial real estate.

The residential sector attracted just USD 1.5 bn of foreign PE in the same period, trailing behind even the retail sector which saw cumulative inflows of USD 1.7 bn.

In stark contrast, domestic PE funds pumped nearly USD 2.4 bn into Indian real estate since 2015, of which nearly 71% (approx. USD 1.7 bn) went to the housing sector.

This was a period of considerable stress for the residential segment; domestic funds invested heavily into a sector plagued by issues like delayed/stalled units, low sales and fairly lower yields. This made exiting investments with substantial gains difficult.

The commercial real estate segment, on the other hand, delivered a comparatively stellar performance in the last five years. Steady demand and rising rentals gave foreign investors a decisive edge.

Moreover, the overwhelming response to Embassy Office Parks’ REIT launch – and its superlative performance – saw commercial real estate segment emerge as the bigger draw for investors. Several other large developers are also keen on listing their commercial assets under REITs.

An additional infusion of USD 1.6 bn between 2015 and Q3 2019 was a mix of foreign private equity and funding by Indian developers or investors who collaborated either at project or entity levels. For instance, in 2018, Canada’s CPPIB and India’s Phoenix Group together invested nearly USD 100 mn into a mall project in Bangalore.

Domestic vs Foreign PE Funds

  • Of the total USD 14 bn foreign investments in Indian real estate between 2015 and Q3 2019, nearly USD 8.8 bn went into commercial realty, followed by USD 1.7 bn in the retail sector and USD 1.5 bn into the housing sectorLogistics & warehousing drew over USD 1 bn, and the remaining investments went into mixed-use developments.
  • The reverse played out with domestic funds – of the total USD 2.4 bn they invested in this period, housing drew the lion’s share of USD 1.7 bn (or 71%); commercial came next with approx. USD 600 mn and retail drew just USD 40 mn of domestic funding.
  • The top 5 foreign investors – Blackstone, Brookfield, GIC, Ascendas and Xander – alone contributed 75% of the overall USD 14 bn into Indian real estate. Interestingly, their focus was not limited to the top 7 cities and extended into tier 2 cities like Indore, Ahmedabad and Amritsar.
  • The top 5 domestic funds – Motilal Oswal, HDFC Venture, Kotak Realty, ASK Group and Aditya Birla PE – invested nearly 54% or approx. USD 1.3 bn into Indian real estate. They focused exclusively on the top 7 cities.

Crystal-Gazing Future PE Trends

Indian commercial real estate will continue to attract PE funds as there is high demand for Grade A office spaces across the top Indian cities.

Earlier data indicated that the first three quarters of 2019 alone saw inflows of USD 3 bn in the commercial segment – an increase of 43% over the corresponding period in 2018.

Logistics, warehousing and retail will continue to witness considerable growth on the back of recently-eased policy norms for the retail sector, aimed at boosting growth and attracting more investments.

Over the short-to-mid-terms, the housing sector – which has the greatest need for liquidity infusions – will retain its ‘poor cousin’ status and garner much more gradual attention from wary investors.

Though the FM recently unleashed an alternative investment fund (AIF) of INR 25,000 crore to revive languishing housing projects across the country, investors will watch for actual implementation and deployment.

ANAROCK Capital data indicates:

  • The residential segment drew approx. USD 295 mn PE funding in the first three quarters of 2019 (against USD 210 mn in the corresponding period last year)
  • Though this constitutes an impressive 40% annual gain, investments are still far below the 2015 peak levels of 2015, when housing drew PE investments of approx. USD 1.5 bn.
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The WeWork Debacle: Good, Bad or Inconsequential?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

Coworking giant WeWork has been in the news for all the wrong reasons, and market doomsayers are going to town on the topic. How concerned do we really need to be?

Though WeWork is in aggressive expansion mode across the world, its India operations are a minuscule, single-digit fragment of its global operations.

It continues to position itself as the wave of the future – the last word in community-based offices – and investing in this is WeWork’s primary focus right now.

While its India valuation and future expansion plans may not be deeply impacted by the recently jinxed listing plans, this is not even a statement on the potential of coworking in India.

Still a very nascent segment in this country, coworking nevertheless has massive demand and witnessed a 23% growth in Q2 2019 over the preceding quarter across the top 7 cities.

Embassy Group acquired the franchisee rights of WeWork in India with 80% stake in it, and the coworking vertical is not likely to face any funding challenges. Embassy’s recent successful REIT-listing has given it an upper edge and will work in its favour.

This is not to say that such events have zero impact on the larger market. Consolidations are happening across sectors, including in coworking.

Consolidation within coworking spaces started in 2018 with major acquisitions like One Co.Work  acquiring  IShareSpace  and AltF CoWorking  acquiring Noida-based Daftar India etc. This trend will continue.

As per data, more than 200 players were operating such workspaces (both branded and non-branded) across the country early this year.

If we are to consider the top 6 players in this space, they alone have close to 300 centres across multiple cities in the country. These six players include CowrksWeWork IndiaAwfisRegusSmartworks and 91springboard.

To mitigate leasing risks, many companies are now shifting to a revenue-sharing model instead of leasing. Essentially, coworking operates on three different models – sub-leasing, own-and-lease and revenue-sharing model.

While each has its pros and cons in today’s time, the revenue-sharing model is working out the best for most companies.

Here, the owner/landlord makes the initial investment for office fit-outs for the coworking player and thereafter becomes his business partner. This is proving to be the least risky approach, as both parties share profits based on pre-determined percentages.

Also, the initial investment on fit-outs and office set-up, which tenants would not be able to pay, are borne by the landlord. Most of the clients of co-working spaces are start-ups which invariably have initial funding issues. This is why the revenue-share model works best for them.

As on 2018-end, the total supply of flexible workspaces was anywhere between 7 – 7.5 mn sq. ft. area and is expected to cross 10 mn sq. ft. by 2019-end.

While demand for coworking spaces has seen phenomenal annual growth between 30-40% in previous years, trends suggest that it may grow by a more moderate 15-20% over the next few years.

Coworking properties located in India’s CBD areas have an occupancy of nearly 80-85% at a given time, while in suburban areas it is somewhere between 60-70%. This is probably the reason why all major coworking deals happen in prime locales around the CBD.

In H1 2019, of the total 28 mn office space absorption in the top 7 cities, almost 5 mn sq. ft. of flexible workspaces were leased across these cities. Maximum leasing activity in coworking spaces was recorded in Bengaluru during the period, followed by HyderabadChennaiNCR and MMR respectively.

The massive demand for coworking spaces in the country by budding entrepreneurs, tech start-ups and even the big multi-nationals is beyond dispute.

Given this growth potential in India, the overall impact of WeWork’s troubles on Indian coworking firms may not be significant. Organized players are likely to continue to thrive, smaller players will consolidate and the coworking show will go now.

Image by Raysonho @ Open Grid Scheduler / Scalable Grid Engine – Own work, CC0

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New Financing Options for Self-Redevelopment

Shobhit Agarwal, MD & CEO – ANAROCK Capital

In a bracing and timely new trend, progressive consultancies offering specialised services and financial assistance for the housing sector are beginning to make their mark on the Indian residential real estate landscape.

For instance, many consultancies offer rental deposit loans to young professionals who prefer to rent rather than buy properties. Via these consultancies, they can secure loans to pay the security deposit which can equal up to 8-10 months’ rent advance.

Unlike in personal loans, the principal payment is made directly to the landlord and returned to the consultancy when the lease agreement ends. The tenant pays interest through the lease tenure.

However, an even more exciting service being offered these days is self-redevelopment funding and management. Firms that offer such services to housing societies are becoming very relevant in cities like Mumbai.

Rather than involving a developer to carry out the redevelopment, housing societies can outsource the entire task to expert consultancies to both finance and manage the redevelopment process according to exact needs and specifications.

The scope of services offered by such consultancies goes beyond just redesigning and construction and extends to handling the associated manpower management and paperwork, dealing with government agencies and even the sale of extra flats based on the FSI and TDR available to the housing society.

While banks and housing finance companies are currently not keen on granting loans to developers, individual societies opting for self-redevelopment can still access finance via these companies.

An increasing number of housing societies in ageing projects are considering of taking the self-redevelopment route. With the help of specialized services, these societies can not only avoid the risk of delays by developers but also access cheaper loan rates.

A society opting for self-development can get a loan for relatively lower interest rates like 12.5%, as opposed to loans to developers which can attract interest rates in the region of 20%.

In the past, the only real option for such housing societies was to entrust the entire redevelopment project to a developer. Today, self-development by housing societies has become a real possibility – and they can now avail of specialized support.

We are likely to see more such consultancies entering the fray as the trend of self-redevelopment becomes more prevalent, especially with various state governments making policy changes to promote self-redevelopment. In fact, this new sector would open up in all earnest if self-redevelopment projects are given more tax exemptions.

The number of buildings that need to be redeveloped in Mumbai is constantly rising. Just before the onset of monsoons this year, the Maharashtra Housing and Area Development Authority (MHADA) identified more than 14,000 buildings within Mumbai as dilapidated structures which needed to be redeveloped with no further delay.

In other words, the opportunities for such consultancies are on the rise. Apart from Government support, they are perhaps the most important link to successful self-redevelopment in cities like Mumbai.

They radically empower housing societies to take charge of the redevelopment of their societies based on their preferences and needs, providing a 360-degree, streamlined redevelopment process.

Self-redevelopment of housing projects does not only give housing societies the assurance of time-bound, cost-controlled and predictable results.

It also brings down the cost of surplus apartments, as opposed to the price inflation which results when a developer with the sole objective of hefty profit margins is involved. In other words, housing societies which self-redevelop their premises can sell the resulting extra flats at lower and more competitive rates.

Considering the various benefits such services bring to the table, a transparent and consolidated management fee – as opposed to the often-gargantuan cost and time overruns of an unplanned or mercenary approach to redevelopment – is indeed a price worth paying.

Redevelopment needs to become an exact science, and the industry looks forward to more and more such specialized players coming to the fore to help increase competitiveness in pricing, and overall efficiency.

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Real Estate Attracts $3.8 Bn Private Equity from Jan-Sept 2019; Nearly 19% Yearly Rise

  • Private equity investments were over USD 3.2 bn in the corresponding period of 2018
  • Commercial sector comprised 79% overall share; attracts close to USD 3 bn funds
  • Residential attracts USD 295 mn during Jan. – Sept. 2019 against USD 210 mn a year ago
  • Retail and logistics & warehousing see total inflows of approx. USD 260 mn & USD 200 mn in 2019 respectively
  • MMR sees maximum inflows at USD 1.59 bn this year; records yearly increase of 3%
  • Pune sees more than 200% yearly rise in investments – from USD 125 mn in 2018 to nearly USD 390 mn in 2019
  • Hyderabad witnessed a 76% yearly decline – from over USD 790 mn in 2018 to just USD 190 mn this year
  • Of total USD 3.8 bn funds in 2019, equity funding comprises 95% share
  • Indian real estate in Q3 2019 alone sees total PE inflows of nearly USD 1.7 bn

Shobhit Agarwal, MD & CEO – ANAROCK Capital

Giving a flicker of hope to cash-starved Indian real estate, private equity funds have pumped in nearly USD 3.8 bn between January to September period in 2019, reveals recent research by ANAROCK.

Recording nearly 19% yearly gain, total inflows equalled over USD 3.2 bn in the corresponding period a year ago.

As much as USD 3.6 bn was equity funding – comprising nearly 95% overall share – while the remaining 5% was via structured debt.

Also, foreign private equity funds continued to dominate the real estate investment scene. Top investors included Blackstone, Hines, Ascendas, Brookefield etc.

Segment-Wise Break Up

  • Commercial real estate continued to attract maximum PE investments, totalling close to USD 3 bn funds in the first three quarters of 2019. In the corresponding period of 2018, total inflows within this segment equalled nearly USD 2.1 bn, thus rising by 43% in a year.
  • Residential segment, on the other hand, received USD 295 mn funding this year as against USD 210 mn last year, thus seeing nearly 40% yearly gain.
  • Retail segment attracted close to USD 260 mn funds from January till September 2019 whereas last year it saw inflows of USD 355 mn, a reduction of 27% in a year.
  • Logistics & warehousing witnessed 27% decline in total PE inflows in 2019 and equalled nearly USD 200 mn as against USD 275 mn a year ago.

Cities On A Roll

  • MMR attracted maximum PE funding in 2019, amounting to approx. USD 1.59 bn. On a yearly basis, the region saw a total inflows increase by 3% from USD 1.54 bn in the first three quarters of 2018.
  • Pune, on the other hand, saw total investments of USD 390 mn between January till September period in 2019 against USD 125 mn in the same period of 2018, a rise of nearly 213%.
  • The IT capital of India – Bangalore– also witnessed nearly 17% yearly gain – from USD 420 mn in 2018 period to nearly USD 490 mn in 2019.
  • Interestingly, Hyderabad, which saw more than USD 790 mn PE inflows in the first three quarters of 2018 saw overall PE funding decline by 76% to USD 190 min in 2019. In the entire 2018, the city attracted total funds worth USD 1.1 bn – more of a one-hit-wonder.
  • Chennai saw investments of nearly USD 230 mn into the real estate sector in 2019 against USD 160 mn a year ago – an increase of approx. 44%.
  • PE funding in NCR continued to squeeze further in 2019 with investors pumping in merely USD 115 mn in contrast to USD 150 mn in January to September period of 2018.

Deals in Q3 2019

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Over USD 25 Bn Worth Of REIT Launches In Next 3 Years – ANAROCK

  • Over 150 mn sq. ft. rent-yielding office properties could get listed in the top 7 cities in 3 yrs; this is 25-30% of the total Grade A office space in India
  • Top 7 cities have close to 550 mn sq. ft. Grade A office supply; of this 310-320 mn sq. ft. is REITable currently
  • Prestige, RMZ Corp, K Raheja Corp, Godrej Properties & Panchshil Realty gearing up for REITs
  • Global heavyweight investors eyeing India’s revving REIT machine
  • Residential REITs still a distant reality; low rental yields major roadblocks

Shobhit Agarwal, MD & CEO – ANAROCK Capital

Commercial REITs may raise over $25 billion for Indian real estate over the next three years, research by ANAROCK Capital reveals.

This involves the listing of more than 150 mn sq. ft. of rent-yielding Grade A office properties across the top 7 cities – covering 25% to 30% of the overall Grade A office space in these cities.

Currently, the top 7 cities have close to 550 mn. sq. ft. Grade A office supply – of which 310-320 mn sq. ft. is REITable as of now.

The recent success of India’s first listed real estate investment trust (REIT) offers much-needed hope to the beleaguered real estate sector.

The enthusiastic response to Embassy Office Parks’ REIT launch – and its more-than-satisfactory performance – is priming investors for similar REIT opportunities, which in turn will open up more funding avenues for the sector. Several large developers are keen to list their commercial assets.

Bangalore-based Prestige Group plans to list its first commercial REIT very soon and has already started segregating its residential, office, retail and hospitality businesses.

It may also launch a retail REIT as and when the opportunity arises. Other players in the REIT fray are RMZ Corp, K Raheja Corp, Godrej Properties and Panchshil Realty.

REITs will help commercial developers improve their liquidity by unlocking the value of their assets to raise capital.

For big and small investors, it is a highly de-risked investment route offering annual returns of as much as 12-14% over the long-term – an attractive proposition when viewed against more volatile asset classes.

Since REITs are a proven success in developed nations, global investors are keen to capitalize on India’s high demand for Grade A commercial real estate.

For domestic investors, REITs are an opportunity to invest in commercial real estate at fairly lower entry levels and add an attractive level of diversification to their portfolios.

While the commercial office sector will dominate Indian REIT listings for the next couple of years, retail and logistics REITs are sure to follow. However, Indian residential REITs remain at best a distant possibility.

The draft Model Tenancy Act, 2019 will make rental housing a more attractive investment play – but for Indian residential REITs to succeed as they have in countries like Singapore and the US, rental yields on Indian housing need to significantly surpass the current 1-3%.

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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.

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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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