Maturity in Indian real estate market
It is a fact that the real estate sector in India has been witnessing a downward trend due to the existing slowdown of the nation’s economy. However, the future of the sector seems to be brighter in the days to come.
As per data available, there is already around 70 million square feet of office space (Grade A) in the top eight cities, which is likely to provide huge demand for residential real estate. It would also give way to better opportunities in fields like project management, facilities management, etc.
Cushman and Wakefield in its report on Real Estate Investment Market states that, amid slowdown, the total value of private equity investments in real estate sector increased by 7 percent in 2012 to $ 1.45 billion.
Even in the recent April-June quarter, the PE investments increased in volume and value as well to $318 million, an increase of 85 percent over $172 million raised by real estate companies from PE investors in the corresponding quarter last year. PE investors invested in 13 companies in this quarter, which is more than double of six companies in the corresponding quarter of 2012.
Some of the PE firms have closed large deals in this year so far and have decided to refocus on real estate than any other traditional sectors. Blackstone finalised the biggest real estate deal in Jan-Mar 2013 quarter, by investing $367 million in Embassy Group’s Bangalore project while in the recent June quarter, Ascendas Trust acquired 2 million sqft of office space in Hyderabad from Phoenix Group for $110 million. Xander group invested $52 million in Supertech’s 125 acre township project in Gurgaon and Clearwater Capital (along with Ajay Piramal Group non-banking financial company PHL Finance) shred out $50.2 million investment to finance VGN Developers’ acquisition of a land parcel for a gated community project in Chennai.
The total private equity of approximately summed to Rs 1,100 crore in Q1 2013 maintaining its previous quarter levels. At present, the debt estimate to the real estate and development sector is worth over $24 billion and is likely to rise in the next few years. As more and more public sector financial institutions are getting commercialised, it is expected to increase the chances of availing funds to many big real estate and infrastructure projects at reasonable rates.
However, PE-real estate investments in the first six months of 2013 at 21 transactions ($887 million across 20 deals with disclosed values) are still down 16% compared to the 25 investments in the corresponding period in 2012 ($659 million across 22 investments).
Many big infrastructure projects such as the Delhi-Mumbai industrial corridor along with the western and eastern freight corridor possess the potential to create new cities and economic centres providing immense growth prospects to the region, in the years to come.
Also, in the recent years, due to certain limitations in the Indian debt market in the form of short maturity period and high rate of interest, the route of External Commercial Borrowing (ECB) has become very popular among real estate firms in India. ECBs provide an additional source of funds to the companies as they let them to supplement domestically available resources. The borrowers are also benefitted by the lower rates of interest prevailing in the international financial markets. The money raised through ECB is cheaper given at near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that. However, the borrowers can use only 25 percent of the ECB to repay rupee debt while the remaining 75 percent can be used for their new projects.
Foreign debt flows like ECBs have become a big source for getting easy funds, especially in Indian realty. More and more financial institutions are foraying into the real estate market in India, as the agencies have realised that although the ticket sizes of investments are small, the profit gained is high over here. With this trend emerging in the sector, the previous practices of getting investments from black market and collective investors have been reducing to a great extent.
All these positive points are indicating towards long sustainable growth with a new phase of realty market that is likely to offer a wide range of options for various professional services on a long-term basis.
