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PREMIUM SPACE?

Foreign investors flock to commercial projects as India’s residential market struggles

REUTERS/FRANCIS MASCARENHAS
Chasing high returns.
  • Sangeeta Tanwar
By Sangeeta Tanwar

I write about all things retail

Published

India’s commercial real estate segment was a big draw for foreign investors in the past five years, even as residential projects struggled to raise funds.

As a whole, the real estate sector attracted $14 billion (Rs1 lakh crore) in overseas private equity (PE) investment between 2015 and the September quarter of 2019, according to a note by Anarock Property Consultants released yesterday (Nov. 18). The majority (63%) of this went to commercial realty, which includes office spaces, hotels, and restaurants.

Five funds accounted for 75% of the overall foreign investment, the note said.

Top foreign PEs in Indian realty
Blackstone
Brookfield
GIC
Ascendas
Xander
Source: Anarock

Steady demand for office space and rising rentals gave foreign investors a decisive edge over the past five years,” said Shobhit Agarwal, managing director and CEO, Anarock. There was also the overwhelming response to the stock market listing of Bengaluru-based Embassy Office Parks’ REIT (real estate investment trust) this year, he added.

A REIT is a firm that owns and, most of the time, operates income-producing real estate such as office spaces, apartments, warehouses, hospitals, shopping centres, hotels, and timberlands. Structured like mutual funds, REITs can be listed on the bourses and its shares traded.

In March 2019, Blackstone-backed Embassy Office Parks became India’s first REIT to launch an IPO (initial public offering), which was well-received by investors.

Domestic fund inflows

In contrast to their foreign counterparts, domestic PE funds channelled 71% of their $2.4 billion real estate investment into residential projects in the past five years. Five domestic funds accounted for 54% of the total.

Top five domestic funds
Motilal Oswal
HDFC Venture
Kotak Realty
ASK Group
Aditya Birla PE
Source: Anarock

Their investments struggled to make gains, according to Anarock.

The past few years have marked a period of considerable stress for the residential segment. “Domestic funds invested heavily into a sector plagued by issues like delayed and stalled units, low sales and fairly lower yields. This made exiting investments with substantial gains difficult,” said Agarwal.

Outlook

Commercial real estate continues to be the hot investment target. PE inflows of $3 billion have already been channeled into commercial projects till September 2019, up year-on-year by 43%, showed the data from Anarock.

The trend will most likely continue in the quarters ahead, as there is high demand for grade A office spaces across top Indian cities. “Investors are eyeing REIT opportunities, which are expected to open up more funding avenues for the sector,” said Agarwal.

The residential segment, though, has attracted only $295 million PE funding in January-September 2019. While that marks a 40% year-on-year jump, it is no match to the peak $1.5 billion investment levels of 2015, showed Anarock data.

Finance minister Nirmala Sitharaman’s recent move to set up an alternative investment fund of Rs25,000 crore to provide debt funding for stalled housing projects may prove inadequate, according to Anarock. Investors will watch for actual implementation and deployment of the fund before making any investment calls, it said.

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