Embassy REIT raises Rs 7.5 bn through NCDs
This fund is the second one to be raised through the NCD route. September 2020
The private equity investment activity dropped to $238 million, with only five deals getting concluded in 2020 (YTD till May 31), a 93-per-cent drop in YoY comparison; according to the ‘Investments in Real Estate’ report launched by Knight Frank India. The drop can largely be attributed to the COVID-19 pandemic, which impacted investor sentiments as well as the slowdown of the Indian economy in 2019. The year has also seen 80 per cent drop in the number of deals concluded in the first five months when compared to the same period last year.
Sharp slowdown in the domestic economy and specifically Indian real estate sector will keep the investors cautious. Moreover, with international funds reorienting themselves to 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.
Shishir Baijal, Chairman & Managing Director, Knight Frank India, said, “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. 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. The warehousing segments would be the fastest to recover followed by office. With pay cuts and job losses becoming pervasive, the residential and retail segments would have to chart an arduous journey towards recovery.”
Baijal continued, “Even though India continues to remain an attractive destination globally for companies to have their offices in, the prevailing business uncertainty and any event of recession forecasted in the upcoming quarters of 2020 will reduce overall demand and impede expansion plans of occupiers. Overall, private equity activity in Indian real estate is likely to be subdued in 2020.”
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.
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 scenario in the pre-COVID years.
Investors expect the warehousing industry to emerge stronger from the COVID-19 crisis globally and expect it to outperform other asset classes in real estate in the near term. They expect warehousing to recover the fastest compared to other segments of real estate. Consequently, investors are directing greater amount capital to warehousing assets. Similar trend is expected to play out in India. Thus, despite increase in country risk premium for India, greater investor interest would keep the cap rates stable at current levels for the warehousing industry in 2020.