´The year 2016 recorded PE investments in well-leased business parks, retail developments (in established Tier-I and Tier-II cities) and JVs for residential developments in relatively well performing markets such as southern and western India,´ says Anshuman Magazine, Chairman-India and South East Asia, CBRE.´These also included developer buy-backs and refinance deals.´ However, the office market witnessed the most investments in 2016, holding 39 per cent of the share (see table on ´Sector-wise share of deals in 2016´).
The next two years are likely to witness continued momentum of investments into the office sector as new investment-grade projects come into supply. Adding to this, Anshul Jain, Managing Director, India, Cushman & Wakefield, says, ´While investments in the residential sector have been solid this year, investors may have a cautious outlook towards the asset class in light of continuing subdued demand.´
Nature of deals
Marquee deals showed renewed interest from investors in Indian real estate. Vijay Agrawal, Executive Director, Equirus Capital, confirms, ´We have seen deals in all categories.´ However, Ashutosh Limaye, National Director-Research, JLL India, says, ´Until the day of demonetisation, November 8, 2016, there was increasing traction in the sector across cities. The market was active in all asset classes - land, PE investments, retail, office and IT, hotels, etc. Thereafter, for the remaining period of the year, nothing changed in office real estate, but consumption dropped in retail and residential.´ He adds that the number of deals in 2017 may be affected. Institutional investors were active throughout in 2016. Large funds like Blackstone, Canada Pension Plan Investment Board (CPPIB), Maple Tree, Tishman Speyer and Morgan Stanley were seeking leased assets investment in India. Vikram Goel, CEO, HDFC Realty, says, ´This spurt of investment in commercial real estate is buoyed by the exit route of real-estate investment trusts (REITs). PE funds are looking to diversify their investment portfolio by targeting retail and hospitality, apart from residential and commercial. This was visible in the deals that closed in 2016.´
During 2016, demand dynamics in the commercial segment continued to be strong. With the availability of investible quality assets, most investors consolidated their portfolio from a REIT listing perspective, avers Magazine.
´There have also been instances of developers buying back stakes in office projects from PE investors,´ he says.
The market saw about 40 million sq ft of gross leasing in the top seven cities. As Rajeev Bairathi, Executive Director & Head-Capital Markets, Knight Frank India, says, ´There had been a marked shortage of vacant area and, consequently, there was a huge pressure on upward revision in terms of rentals. Most foreign institutional investors and large pension funds present in the country were interested in buying leased-out assets, whether office or quality retail modes. In fact, they were some of the large ticket transactions that got completed during 2016.´
´ We are witnessing large IT park space aggregation by large PE players along with established developers,´ adds Agrawal. While Blackstone has closed several deals in the commercial sector, ´It has also partnered with various developers for aggregation of IT park space. This is a precursor for the launch of their REIT,´ says Agrawal. Besides, there is renewed interest from international players like HEINES, Ascendas and Tishman Speyers in commercial and IT parks.
The retail sector has witnessed a large number of deals, some high-profile ones in the mall space. While Blackstone is aggressively buying malls with its Nexus Malls, others such as GIC and CPPIB were raising the game in retail properties. Further, investors such as Blackstone and Xander (Virtuous Retail) are looking at consolidating a retail portfolio for future REIT listings. According to Magazine, ´Investments are not limited to the gateway cities of Delhi and Mumbai only but are spreading across Tier-II cities such as Ahmedabad, Amritsar and Surat.´ And Agrawal adds, ´Phoenix is in the process of selling its two mall assets in Bengaluru and Pune to an investor.´ Further, anticipating a revival in the sector and given the potential to list under the REIT, retail assets are attracting large investments from some funds, believes Jain. Therefore, the year-to-date (YTD) investments in retail assets during 2016 increased 273 per cent to Rs 38,000 million ($569 million), over Rs 10,200 million ($156 million) noted during the same period of 2015.
The residential segment has seen multiple deals, including several structured finance and equity deals, which shows renewed investor interest. ´We have also seen deals where one developer has sold its land parcel to another to improve operational efficiency and reduce the group´s overall debt,´ informs Agrawal. Further, investors entered into JVs with developers with a credible track record, for developing prospective residential projects or providing construction finance. Magazine says, ´Investors have been bullish on southern markets such as Hyderabad and Bengaluru, western markets such as Mumbai and Pune, and leading Tier-II cities.´ Residential assets remained the most preferred asset class as over 73 per cent (Rs 66,750 million or US$ 1 billion) of total PE investments during Q3 were in the segment, as per Cushman & Wakefield (see table on ´Announced PE Deals: Asset Class-Wise´).
Jain adds, ´Within residential investments, Mumbai was the most preferred location and accounted for 63 per cent of the share, followed by Delhi NCR and Bengaluru accounting for 18 per cent and 15 per cent of the share, respectively.´
While the number of deals closed during Q32016 declined 3 per cent quarter-on-quarter to 32, the total investments increased by 1.2 per cent, reflecting increased confidence among investors to make larger investments. Jain adds, ´The average deal size therefore, increased from Rs 2.75 billion ($41 million) in Q22016 to Rs 2.87 billion ($43 million) in the third quarter of 2016.´
And, according to Magazine, ´PE firms and NBFCs continued to dominate, addressing the investment or refinancing requirements for most developers with higher cost of capital.´ This trend is expected to continue in coming quarters as well, he says. Moreover, Bengaluru remains a popular office destination; the city recorded a transaction of 11.4 million sq ft in 2016 - the highest in five years.
Narasimha Jayakumar, Chief Business Officer, 99acres, says, ´Bengaluru and Hyderabad are witnessing maximum deals, they have been followed by Delhi, NCR and Mumbai." He attributes this to the robust IT market. With 2016 seeing an approximate absorption of 40 million sq ft of office space, IT-driven southern cities such as Bengaluru, Hyderabad and Chennai did well. He further points to positive market dynamics and the spill-over effect of government measures such as 100 per cent relaxation in FDI leading to an overall improvement in property deals. ´The primary reasons that have led to these deals are high returns on investments, better exit routes, PE firms that are making deals to build a brand in India, and national developers looking for expansion,´ Jayakumar adds.
Investment trends have seen a significant shift from residential to commercial in the past year.
´The slowdown in residential is temporary and is expected to last only till the Benami Property Act and Real-Estate Regulatory Act (RERA) are implemented,´ says Goel.
What´s in store in 2017?
With demonetisation, land transactions have seen a sudden freeze, putting a downward pressure on land prices; pacts involving JVs, joint developments or corporate land divestments are also likely to see an impact. Nonetheless, the year witnessed a few land deals. And, Jayakumar sees an improvement in the second half of 2017. While Agrawal expects a slowdown on premium housing and land deals, Limaye hopes to see the residential sector bounce back in 2017, and Magazine sees greater institutional flows into the commercial and retail sectors post demonetisation.
In the hospitality segment, Bairathi says, ´There are also a lot of hotels in the mid-scale and luxury segment that are or appear to be for sale, and with the economy reviving, we expect some of the transactions to get completed in 2017-18.´
A notable policy initiative is the expected implementation of RERA this year, which Magazine expects will give a boost to foreign or domestic investment owing to improved transparency. Further, big investors like Blackstone and Brookfield Asset Management are now being followed by some new potential entrants. For instance, Goel says, ´Dalian Wanda, a privately held Chinese conglomerate, has shown interest to invest up to $10 billion in India and Fosun International is contemplating an investment of close to $1 billion in India.´
Overall, in 2017, investments will be strong, stemming from high-value deals in the commercial office asset class - which is expected to record the highest annual investments- and steady volumes in the residential segment.