Real estate capital markets:
2015 has been an interesting year for capital market activities in real estate. While the PE focus continued to remain high on residential and office projects, entity-level investments and platform-level deals also came into the limelight, indicating increase in investor confidence. In terms of asset focus, residential projects attracted a considerable share of funding; however, equity investment in this space is still insignificant. Income-yielding office projects attracted a majority of equity investments. In terms of the geographical spread, focus was restricted to tier-I cities with NCR, Mumbai and Bangalore attracting a majority of investments (73%); reflecting learning from past experience.
Overall, the stage is set for a superlative show next year. In fact, 2016 may well bring the kind of investment activities that were seen in 2007 – the previous peak year which saw investments of more than USD 8 billion into Indian real estate.
Year of fund-raising:
Several private equity (PE) funds are either planning or are already on their way to raise almost $4 billion from overseas investors to invest in real estate in 2016. With project cash flows still weak and bank lending not easily available, developers are securing much of their funding requirements from external pools such as PE funds.
A slow and gradual recovery:
The real estate sector that suffered much pain in the past two years is moving towards a more rational regime where developers, having learnt from their mistakes, now focus on project execution and delivery. 2016 is expected to gradually move towards better home sales and see a spurt in launches in some locations. The year will also see the sector moving from an investor-driven to an end-user driven cycle. Home prices, which declined to some extent in 2015, may see further correction as customers are still delaying home-buying decisions. Prices may stabilize in some other markets.
More platform-type deals, more offshore investors to come in:
With the government easing foreign direct investment (FDI) norms in the construction sector, more offshore investors are likely to invest in real estate. This will also enable smaller-sized investments. More exclusive partnership platform transactions between Indian developers and investors are also expected to happen, giving fund managers more control over investments and decision making. The relaxation of FDI norms in the midst of a prolonged slowdown in the sector is expected to bring back some cheer in the real estate sector.
Return of equity investments:
After more than three years of PE funds doing primarily debt and debt-structured transactions in real estate, a few of them are again ready to infuse equity capital into projects to get better returns through long-term commitments. Housing Development Finance Corp. Ltd, through an entity, is raising an $850 million fund which will do pure equity deals. Some investors are looking to increase the equity portion in their new funds or are introducing equity, thereby taking on more risk.
Commercial office space:
The commercial office sector, which was a saving grace during the slowdown, is expected to further shine in 2016. Vacancy levels have fallen and large firms, many in the e-commerce space, are taking up new space at a brisk pace. Buyouts of ready commercial space is on, and private equity funds are now even looking at investing in under-construction properties. Realty firms with office development portfolios are not only focusing on growing their business, but in some cases are also shifting focus from residential to rent-yielding office projects.
The real estate industry is maturing. Until 2014, it was unregulated, fragmented and highly inefficient. Though 2016 will bring in regulation, it will remain fragmented and moderately inefficient. We could see it become a well-regulated, consolidated and moderately efficient industry by around 2020. Growth in the Indian economy will definitely see favorable reflection in the real estate sector, as well.