Inarguably, the Indian real estate vertical that in dire need of funding is the residential sector.
Chennai:
Fallout of note ban on industry thriving' on black money
The long-pending enactment of the Real Estate Regulation Act (RERA) drew clear regula-tory lines for the housing market - for the very first time in India. Unregulated developers had to fall in line, step out of the game or merge with more organised players.
The rebooted Benami Transactions Act closed another gaping loophole, making unregis-tered property purchase and ownership impossible.
The application of the unified GST to replace all other previous taxes related to residential property purchase added another layer of regulation, resulting in increased complexity as well as increased cost of acquisition for most unfinished projects.
According to Anuj Puri, Chairman of Anarock Property Consultants, “While all these measures were arguably essential for the long-term viability of the Indian housing sector, they resulted in a lot of uncertainty. Private equity players are highly averse to uncertainty, so it is not surprising that the residential space has fallen out of favour with them.”
As per ANAROCK data, between 2015 and 2018, the share of private equity investments in the residential sector reduced from 47% to a mere 3%. Concurrently, commercial real estate saw a significant rise in PE investments.
Private equity investors have been steadily drifting away from the residential sector and are increasingly focused on the country's commercial office segment. Puri believes that Indian office spaces - particularly Grade A projects in CBD and SBD areas - have gained significant momentum over the last four years. “Also, the Indian commercial real estate segment has historically been far more transparent and predictable than the residential sector,” he adds.
Will private equity funding in residential segments revive?
In Q1 2019, the country’s housing sector saw private equity PE inflows of $143 mn out of the total $1.1bn PE investments. However, it seems likely that the tide is turning - thanks largely to the significantly increased momentum witnessed in the affordable housing seg-ment. There is now a vastly improved business rationale for such housing emerging among institutional investors.
In 2018, HDFC created two platforms of close to $700 mn with Prestige Group and ATS Group. These platforms' primary objective is to provide long-term equity and mezzanine capital to marquee developers of affordable and mid-income housing in India, at the land and pre-approval stage.
Puri says that niche residential segments such as student housing and co-living are seeing massively increasing demand. “These sub-segments have a lot of potential to attract PE in-vestments. Already, a number of organized players, including start-ups, are venturing into them,” he informs us.
For instance, Sequoia Capital invested $10 mn in the Delhi-based student accommoda-tion platform Stanza Living. Goldman Sachsand HDFC were also key contributors to stu-dent housing in 2018.
Global PE fund Warburg Pincus and mid-market hospitality chain Lemon Tree Hotels set up a JV towards the end of 2018 to create India's first co-living platform focusing on the development of affordable, yet conveniently-located living spaces for students and young working professionals. They are targeting all major educational clusters and key office markets in India.
Unsold Inventory - The Main Obstruction: While the rise of niche residential sub-segments is certainly part of the revival story for PE inflows into residential real estate, PE investors need confidence boosts at a macro level, as well. This naturally involves clearing enough of the pent-up unsold housing inventory of nearly 6.65 lakh units across the top 7 cities.
Puri remarks that housing sales did see a 12% increase in the first quarter of 2019. “This heartening rise is primarily because GST rates as well as repo rates were reduced, but also because a lot of the new housing supply hitting the market is in the affordable category,” he adds.
Reviving consumer confidence will result in consistently improving housing sales, which will play a major role in attracting more PE investments into the Indian residential sector. It goes without saying that the industry's fingers are crossed for better times ahead.
In a perfect world, the private equity that is now pouring into the country's realty sector would focus on where it is needed most. However, private equity (PE) firms have their own investment rationale, and the domestic residential real estate has been far from attractive to them.
There are sound reasons for this. The sector has been hounded by multiple problems for the last 3-4 years. These include the issue of stalled/delayed projects, liquidity crunch, and high property values despite weakened demand and slow sales. The country's housing market has also seen the highest impact of policy-induced disruptions. Given the fact that the housing market was tainted by malpractices and lack of customer-centricity by developers, the Government had to step in with policy interventions squarely aimed at cleaning up the sector.
Fallout of note ban on industry thriving' on black money
The long-pending enactment of the Real Estate Regulation Act (RERA) drew clear regula-tory lines for the housing market - for the very first time in India. Unregulated developers had to fall in line, step out of the game or merge with more organised players.
The rebooted Benami Transactions Act closed another gaping loophole, making unregis-tered property purchase and ownership impossible.
The application of the unified GST to replace all other previous taxes related to residential property purchase added another layer of regulation, resulting in increased complexity as well as increased cost of acquisition for most unfinished projects.
According to Anuj Puri, Chairman of Anarock Property Consultants, “While all these measures were arguably essential for the long-term viability of the Indian housing sector, they resulted in a lot of uncertainty. Private equity players are highly averse to uncertainty, so it is not surprising that the residential space has fallen out of favour with them.”
As per ANAROCK data, between 2015 and 2018, the share of private equity investments in the residential sector reduced from 47% to a mere 3%. Concurrently, commercial real estate saw a significant rise in PE investments.
Private equity investors have been steadily drifting away from the residential sector and are increasingly focused on the country's commercial office segment. Puri believes that Indian office spaces - particularly Grade A projects in CBD and SBD areas - have gained significant momentum over the last four years. “Also, the Indian commercial real estate segment has historically been far more transparent and predictable than the residential sector,” he adds.
Will private equity funding in residential segments revive?
In Q1 2019, the country’s housing sector saw private equity PE inflows of $143 mn out of the total $1.1bn PE investments. However, it seems likely that the tide is turning - thanks largely to the significantly increased momentum witnessed in the affordable housing seg-ment. There is now a vastly improved business rationale for such housing emerging among institutional investors.
In 2018, HDFC created two platforms of close to $700 mn with Prestige Group and ATS Group. These platforms' primary objective is to provide long-term equity and mezzanine capital to marquee developers of affordable and mid-income housing in India, at the land and pre-approval stage.
Puri says that niche residential segments such as student housing and co-living are seeing massively increasing demand. “These sub-segments have a lot of potential to attract PE in-vestments. Already, a number of organized players, including start-ups, are venturing into them,” he informs us.
For instance, Sequoia Capital invested $10 mn in the Delhi-based student accommoda-tion platform Stanza Living. Goldman Sachsand HDFC were also key contributors to stu-dent housing in 2018.
Global PE fund Warburg Pincus and mid-market hospitality chain Lemon Tree Hotels set up a JV towards the end of 2018 to create India's first co-living platform focusing on the development of affordable, yet conveniently-located living spaces for students and young working professionals. They are targeting all major educational clusters and key office markets in India.
Unsold Inventory - The Main Obstruction: While the rise of niche residential sub-segments is certainly part of the revival story for PE inflows into residential real estate, PE investors need confidence boosts at a macro level, as well. This naturally involves clearing enough of the pent-up unsold housing inventory of nearly 6.65 lakh units across the top 7 cities.
Puri remarks that housing sales did see a 12% increase in the first quarter of 2019. “This heartening rise is primarily because GST rates as well as repo rates were reduced, but also because a lot of the new housing supply hitting the market is in the affordable category,” he adds.
Reviving consumer confidence will result in consistently improving housing sales, which will play a major role in attracting more PE investments into the Indian residential sector. It goes without saying that the industry's fingers are crossed for better times ahead.