Mumbai Metropolitan Region

Despite being the most expensive property market in the country, Mumbai Metropolitan Region continues to be the prime market for attracting investor interest. Structured equity or debt was the preferred route of investment as the city received the major portion of private equity investments in the past year.

Out of the total Rs 19,500 crore, Mumbai received more than 1/3^rd or 34 % investments in the sector in 2015, showed a JLL India study. The city was followed by Delhi-NCR, Chennai, Bengaluru and Pune receiving 29%, 14%, 11% and 5% respectively. Talking about this trend, Shobhit Agarwal, managing director-capital markets, at JLL India said, “The preference for these cities reflects learning from past experience. While investors remain cautious about which cities to invest in, what is interesting to observe is that the ratio of structured equity and debt was more than half of the total investments received.”

Rubi Arya, Executive Vice-Chairman, Milestone Capital Advisors anticipates equity deals to gain a foothold over the next two three years because of an expected increase in commercial  real estate funding due to instruments like real estate investment trusts. Arya said, “We have seen proven returns from such structures and will continue introducing products in this space for some more time. But from a safety viewpoint, structured debt will remain preferred route for investors.”

Core commercial assets are being preferred over asset classes such as residential, hospitality and retail for plain equity investments. The preference indicates how investors are circumspect despite being optimistic about major potential gains in real estate. Also, important has been the preference amongst investors to invest in projects of developers with a good track record and credibility.

While residential and office projects continue to be the focus for PE investors, entity-level investments and platform-level deals come into the limelight, indicating increase in investor confidence. The JLL report said that a total of Rs 6,048 crore worth of entity-level equity yes deals were witnessed. Deals such as Goldman Sachs and Warburg Pincus investing in Piramal Realty and Blackstone buying Alpha G:Corp aggregating to around Rs 4,000 crore were amongst the 10 entity-level investments witnessed in the year 2015.

In terms of asset focus, despite receiving a reasonable share of funding, residential projects have not received much from equity investment. At the same time, a significant sum of equity investments has been towards income-yielding office projects. Although residential and office will attract a majority of investments, retail is expected to soon gain a foothold in the market.

Indian Real Estate becomes attractive for Foreign Investors

Indian real estate market has become increasingly attractive for foreign investors after almost 5 years, as indicated by India-specific fundraisings.

Talking about the improvement in foreign investors’ confidence in real estate market, Shobit Agarwal, Managing Director of Capital Markets at JLL India, said “During the pre-GFC (global financial crisis) phase, 82% of funds got raised in US dollar. This reduced to 57% in post-GFC phase when micro-market understanding was required more than banking on the macro-economy. Interestingly, the contribution, 2014-onwards, has increased considerably to 70% – hinting that the positivity is here to stay for some time.”

The increase in investment gained impetus before the Lok Sabha elections of 2014 and has only increased further as evidenced by funds amounting to $2.2 billion (Rs. 14,860 crore) that has been raised so far in the current investment cycle.

The recent policy measure of easing foreign direct investment rules is also expected to bring more capital in the real estate sector. Encouraged by this, private equity funds are looking to leverage on this rising interest among foreign investors.

According to Rubi Arya, chief executive of Milestone Capital Advisors, “Offshore funds are showing interest in Indian real estate and there is lot of interest from FDI funds back in Indian real estate. We believe this is an opportune time to invest in Indian real estate, with rigorous risk management and strong asset management. We are planning to leverage further on our structured debt and commercial platform to raise money from offshore funds.”

Adding further she said, “FDI funds are looking to invest in pre-leased commercial assets, create strategic-level partnerships with reputed developers mainly through equity deals and make structured debt investments in residential projects”.

The JLL India report says that India-specific cumulative fundraising attained its peak in the pre-GFC period. During this period between 2005 and 2008, there were 50 such funds that raised $16 billion in total. However, post-GFC, only 29 funds got raised in five years, with cumulative fundraising of $3.9 billion.

The current investment period starting in 2014 has witnessed an increase in the volume of investments as well as the average investment size from $ 134 million to $ 184 million.