Real Estate

Indian real estate witnesses 93% drop in private equity investments: Knight Frank India

Rajesh Kurup Mumbai | Updated on June 10, 2020 Published on June 10, 2020

The private equity (PE) investment in Indian real estate dropped to $238 million, with only five deals getting concluded in 2020 (YTD till May 31), a 93 per cent drop from the same period a year ago.

The drop can largely be attributed to the Covid-19 pandemic, which impacted investor sentiments and the slowdown of the Indian economy in 2019, according to a Knight Frank India report.

The year has also seen an 80 per cent drop in the number of deals concluded in the first five months, compared with the same period last year. A sharp slowdown in the domestic economy and specifically the real estate sector will keep the investors cautious, it said.

Moreover, challenges such as recall of capital by sovereign wealth funds and pension funds and the emergence of opportunities in the developed economies on account of drop in valuations due to recession would cast its shadow on the PE investments in Indian real estate in 2020.

Sharp slowdown in the domestic economy and specifically real estate sector will keep the investors cautious. Moreover, challenges such as recall of capital by sovereign wealth funds and pension funds and the emergence of attractive opportunities in the developed economies on account of drop in valuations due to recession would cast its shadow on the PE investments in Indian real estate in 2020.

Bullish on annuity assets

Private equity has been taking up equity positions in rent yield commercial assets (office, retail and warehousing) and their share in overall investments surged compared to that in residential which involves greater risk.

In the residential sector, PE investors have increasingly turned towards investment via debt or structured debt instruments in an attempt to shun the risk associated with investing equity in development projects.

“The decline in PE investments in real estate had started as visible in the 2019 when it fell by 23 per cent YoY to $6.8 billion. We are operating in uncertain times. Having enforced one of the most stringent lockdown measures globally, 2020 would be a challenging year for Indian businesses,” Shishir Baijal, Chairman and Managing Director, Knight Frank, India said.

“The recall of undeployed capital by sponsors, emergence of attractive opportunities globally, increase in risk premiums, contraction in Indian GDP and Covid-19 related uncertainties would cast its shadow on investor sentiments and we expect the investor activity to be subdued in 2020,” he said.

Office market

After rising for four consecutive years, the private equity investments in office assets declined in 2019. The lack of mature office assets is forcing investors to look at opportunities in under-construction assets and Greenfield developments.

So far, in 2020, only 2 deals amounting to $141 million have been concluded; 2.9 million sq ft of office space got transacted in the year.

Going ahead, the pandemic induced global recession will lead to a significant drop in asset valuations globally, throwing up attractive opportunities in the developed economies. Investors would prefer such opportunities as it does not entail any currency and other emerging market risks.

The risk premiums associated with India and office assets would also increase due to the pandemic. Further, the cycle of strong office rental growth witnessed in India over the last few years is also expected to taper down or stagnate on account of lower occupier demand, impacting valuations.

Moreover, the G-sec yields would not come down in line with the repo rate cuts on account of greater government borrowings and breach of fiscal deficit targets. Investors are in a wait and watch mode and are likely to slow down their investments in office assets in India and on account of all the above factors, the capitalisation rates are expected to expand from 2019 levels.

Year 2020 bleak year

In 2020, there were no investment deals in retail space. Due to the pandemic, many tenants in India have invoked the ‘force majeure’ clause in their rental agreements and demanding rent-free periods, other concessions to compensate for the shutdown, the study said.

Even after easing of lockdown, the fear of contracting Covid-19, restrictions on entry into malls and the low propensity to spend due to job losses and pay cuts may keep retail footfalls low. As a result, retail occupiers are likely to push for greater revenue share arrangements instead of the existing model of minimum guarantee plus revenue share.

The year 2020 looks to be a bleak year for the retail segment and may not witness much investor activity over the next 12 months. Investors are now associating much greater risk with retail assets compared to office and accounting for longer periods of no rentals or lower rentals in their financial models in the near term on account of revenue share arrangements.

Further, retail would be amongst the last to recover. Lower investor appetite, G-sec yields not compressing as much as repo cuts, rental degrowth on account of revenue share and heightened risk perceptions would lead to a significant expansion of cap rates for retail assets and take it much higher than office, which was contrary to the scenario in the pre-Covid years.

Published on June 10, 2020
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