View: Growth of global PE funds in Indian Real Estate

                Capital is global and real estate is local. The interplay of global capital in the local property market has never been so pronounced. Despite the pandemic, we have witnessed 
increasing participation and more interest from offshore investors in the Indian real estate segment.

While large global investors have always remained invested in India despite various international and national regulatory, and economic shocks throughout, the last decade witnessed 
an enlargement in the investor base with the advent of new Canadian, European and Asian investors.

This coupled with the growing exposure across newer asset classes like office space, stressed loans, impact housing, warehousing and data centres will have a far-reaching and 
salubrious impact which may fuel a paradigm shift in Indian real estate over the next ten years.

The previous decade witnessed a resurgence of the real estate market. The first-ever regulator (RERA) was established, bringing back the buyer’s confidence in a sector that was 
plagued with a trust deficit. The revival in the fundamentals of the residential sector was also marred by the Non-Banking Financial Companies (NBFC) liquidity crisis emanating from 
an AAA-rated bond default in late 2018.

The office leasing grew from 28 mn sft in 2010 to 45 mn sq ft in 2020, and also witnessed the listing of two office REITs in the Indian stock exchange. The Goods and Services Tax Act 
2017 ushered in inefficiencies that attracted offshore capital looking to finance the development of warehouses to capture the consolidation and growth.

Setting the stage for global investors

While the sector witnessed a surge at the beginning of the last decade, it was hit by the liquidity crises in 2018 and the global pandemic in 2020. This is the backdrop as we enter the 
new decade in 2021.

The new decade has begun with a huge scale down in real estate debt exposure by NBFCs. This has had a direct impact on residential development and has initiated a consolidation 
in the sector. The NBFCs exposure to real estate has been estimated to be reduced from Rs 200,000 crore as of March 2020 to Rs 130,000 crore in Dec 2020. The office demand 
across six cities dipped to 31.9 mn sft in 2020 and this will get further impacted as the second wave of COVID-19 unravels in India.

The Indian real estate sector was undercapitalized and fueled by debt from NBFCs. The halt of debts from NBFCs and challenges brought on by the first, second and anticipated third 
wave of COVID-19 has created an opportunity for well-capitalized offshore investors to get more exposure with a risk-adjusted return.

As per the report by Savills India, in the first quarter of 2021, all the investment into Indian real estate came from foreign institutional investors. Of the total, 58 percent share (Rs 78.3 
billion) went towards commercial office assets while 42 percent (Rs 56.7 billion) were invested into residential real estate.

The stress in the loan books and the Insolvency and Bankruptcy Act 2016 have enabled global Special Situations/NPL specialists from firms like Oaktree, Fallaron, Bain Capital, SSG 
ARES etc. to allocate over USD 2 billion for purchasing loan books from NBFCs since 2020.

India-based fund managers like Kotak Realty Advisors, IIFL, Nippon India Alternative Investments, KKR, and DMI have raised commitments from offshore investors in recent times for 
investing through structured debt instruments. Besides, large global investment managers and investors including ADIA, Blackstone, Brookfield, GIC, Capitaland, Mapletree, etc have 
continued to make record investments in the office sector.

The recent years have also witnessed new commitments from investors like Ivanhoe Cambridge, CPPIB, Mertiz of Korea, Sumitomo of Japan, Keppel Land of Singapore, APG of 
Netherlands, Allianz of Germany in the Indian real estate sector across strategies.

Will more global investors continue to participate in Indian real estate?

The Indian real estate across products offers one of the best risk-adjusted returns globally, in theory. Consistent performance by some of the large foreign institutional firms such as 
Blackstone, Capital and GIC in the India core assets space has proved global investors the scope of investing in India. This has reaffirmed the confidence of the global capital towards 
Indian real estate.

In addition, global funds have continued to watch the Indian residential market that has been in a transformative phase thanks to various government reforms including the 
implementation of The Real Estate Regulation and Development Act (RERA) and Benami Property Act that have led to improving transparency and accountability in the sector.

While the office segment has been generally favoured by global investors, residential real estate has received a fair share of investments as well, in recent times. As data emerges on 
the recovery of the residential sector and good returns to these new investors, more commitments will be made.

With sales in the mid-income segment continuing to rise and the inherent demand for affordable houses staying strong in the country, foreign institutional firms are closely looking at 
this space as a potential investment opportunity in the long term.

In the affordable housing space, where there is potential for volume growth, commitments have already been made by global Impact funds like IFC, REAL, CDC, ADIA etc. In due 
course, as the affordable housing delivery space becomes more institutionalized and scalable from an investment perspective, we will see more commitments from equity funds as 
well.

Another important factor is the enormous dry powder allocated by global investors for the Asian markets. Data shows that over the last five years, funds dedicated to the Asian real 
estate market have only grown.

For instance, dry powder allocated by Asia-focused private equity funds and venture capital increased from USD 119 billion in 2015 to USD 439 billion in 2020. Looking at this massive 
increase, and sustainable return possibilities in the Indian real estate segment, many more global investors will participate in the sector.

In fact, the following decade will witness greater product-specific participation by Asian and global mainstream investors as Indian real estate undergoes transformation and 
consolidation.

Our estimates suggest that deals or transactions worth Rs 30,000 to 40,000 crore are likely to take place between 2021 and 2022. The year 2022 will also witness newer foreign 
investors coming to India.

Global investors have continued to invest in India and increase their allocations even while the sector dealt with various challenges. This decade will usher a paradigm shift in the 
supply side of the business, creating more sustainable platforms in tune with the needs of global investors.

The participation by Korean and Japanese investors in Indian Real estate, for the first time, is noteworthy. These are highly liquid economies and traditionally export a lot of capital for 
real estate across the globe. The increased global investor participation across strategies, sectors and products will also help in further institutionalization of Indian real estate as it 
grows from strength to strength.

Source: CNBC TV 18