PE funds have crop up as the foremost origin of funding to the builders. As per Knight Frank India’s latest report lending to realty sector (builders) by banks has more than halved in the last two years from 55% in 2014 to less than 24% in 2016.
Samantak Das, Chief Economist & National Director – Research, Knight Frank India said, “Rising non-performing assets (NPAs), higher risk provisioning and mounting losses in the real estate industry have led to significant reduction in credit offered by banks.”
PE funds have turned up as the major begetter of funding for the real estate development sector, accounting for around 60% of the corporate funding requirement of the realty sector, just 21% has been picked up in 2010. PE funding is not confined to equity, but has mostly caught up quasi-equity type of formation.
In the year of 2010, the initial public offering (IPO) route used to be one of the well-approved modes of financing for the real estate sector, which has dematerialized in the recent years for meager standing of the financial sector of those credit supplying companies producing this very sector.
PE inflows recorded a 13% year-on-year drop last year, from $3.6 billion in 2015 to $3.1 billion in 2016. Even the number of deals has lower than 60 last year, against more than 100 deals in 2015. Still, 2016 has observed an average deal size of $56 million.
“As the real estate market in India matures, driven by both regulatory and market forces, we expect PE capital to play an even greater role. Creation of public markets for commercial assets in the form of REITs and sale of distressed assets by banks to reduce NPAs is some of the drivers that would attract a lot of foreign capital into the Indian real estate market,” said Rajeev Bairathi, Executive Director & Head – Capital Markets, Knight Frank India.
The commercial realty sector has been taken over from the residential segment as the most chosen asset class for PE firms in 2016, as compared to 2015.The report said, “A slowing sales volume and huge amount of unsold inventory in the residential segment seems to have shifted the focus of PE players to office segment.”
In the commercial real estate segment the share of PE funding has almost doubled to 35% preceding year, from 18% in 2015 on active demand for office space, surging rental values and limited opening level. To invest in luxury residential property in Kolkata at huge discount level, grab the residential property sale in Kolkata. Foreign investors accounted for more than 70% of the entire PE investments in the Indian real estate business last year.
For PE players Mumbai gets the top preference as an investment location accounted for 57% of the total funding of 2016. Bengaluru finishes with a 20% share. The share of NCR in total PE funding has plunged stridently from 39% in 2013 to just 9% last year. Currently, Indian IT parks are attracting the chief realty investor with an average deal size of $106 million.
“Poor sales volume, huge amount of unsold inventory and stagnant prices in the residential segment of NCR have shifted PE investors interest away from this market,” the report said.
_ By LNN(Liyans News Network)