The last three years have seen a massive shift in private equity investment in the Indian real estate sector from residential properties to commercial properties, according to data compiled by Anarock Property Consultants.
The share of residential sector within private equity investments in real estate fell to just 3% in 2018 from 47% in 2015, the property consulting firm said.
Private equity inflows to residential sector, which was at 1.5 billion in 2015, reduced to 266 million within three years, said Anarock, which provides broking & advisory, retail, investment banking, hospitality and other similar services related to real estate
On the other hand, the PE inflows in the commercial office segment witnessed a significant rise in three years, jumping to 2.8 billion in 2018 from 905 million in 2015.
The Indian residential sector has been severely affected for the past 3-4 years by various factors such as stalled and delayed projects, liquidity crunch and high property values despite weakened demand and slow sales.
Even though the government measures like demonetisation, GST, the Estate Regulation Act and the Benami Transactions Act, cleaned up the residential sector to a large extent, they have also resulted in a lot of uncertainty. This has resulted in private equity investors’ gradual drift to the commercial office segment.
On the other hand, Indian office spaces, especially Grade A projects in both central business districts and secondary business districts, have gained significant momentum in past few years. Moreover, the better transparency and predictability of the commercial office segment as compared to the residential sector has attracted more private equity players to it.
Housing sales witnessed an increase of 12% in the first quarter of 2019, thanks to reduction of interest and GST rates, as well as a renewed focus on affordable housing.
In first quarter, India’s housing sector saw private equity inflows of $143 million out of the total $1.1 billion PE investments into Indian real estate sector.
There is now a vastly improved business rationale for such housing emerging among institutional investors, said Anuj Puri, Chairman, Anarock Property Consultants.
He cited the example of HDFC, India’s largest private sector lender, which along with property developers Prestige Group and ATS Group, created two platforms close to $700 million in 2018. The platform was aimed at providing long-term equity to developers of affordable and mid-income housing in India, both at the land and pre-approval stage.
Anarock added that that there has been an increasing demand in the niche residential segments such as student housing and co-living.
“These sub-segments have a lot of potential to attract PE investments. Already, a number of organized players, including start-ups, are venturing into them”, said Puri.
It pointed out that many organised players, including start-ups are venturing into PE investments in student housing and co-living segments, citing the examples of capital firm Sequoia Capital and Global PE fund Warburg Pincus and mid-market hospitality chain Lemon Tree Hotels.
Sequoia Capital invested $10 million in the Delhi based student accommodation platform Stanza Living. New York-headquartered multinational investment bank Goldman Sachs and HDFC were also key contributors to student housing segment in 2018.
Warburg Pincus and Lemon Tree Hotels had set up a joint venture towards the end of 2018 to create India’s first co-living platform focusing on the development of living spaces for students and young working professionals.
However, Anarock said that unsold inventory remains a main obstruction in the way of reviving PE inflows in the residential sector.
“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”, said Puri.
Reviving consumer confidence will not only result in improving housing sales, it will also help in attracting more private equity investments in the Indian residential sector, he added.