International private equity firms may have pumped in record capital into India’s real estate sector last year, but it is still just 1% of what they invested globally during the year.
India attracted $6.6 billion of inflows into the property sector as against over $610 billion global capital inflows in 2016, a JLL India study showed.
However, this is likely to change with the advent of transparency through Real Estate Regulatory Act, tax reforms and an exit avenue in the form of Real Estate Investment Trusts. The global funds that assign higher weight-age to political stability, particular phase of the country’s property cycle, uptake in commercial spaces have now been reviewing Indian real estate’s potential as their key investment market.
“India’s real estate received just 1% of global private equity realty-focused investment and this is due to the lack of depth and highly fragmented nature of real estate sector here. While they were keen to invest more, PE funds have had to struggle with finding the right partners, and in recent times, their focus has changed to quality of partners instead of IRR (Internal Rate of Return),” said Ramesh Nair, COO – Business & International Director, JLL India.
A vibrant real estate sector with improved transparency will augur well for future fund flows. On the back of higher transparency and corporate governance, many more developers will be able to attract private equity funding.
“The real estate sector in India is going through a reform-driven transformation and global institutional investors such as sovereign wealth funds and global pension funds are clearly noticing this. These funds are looking at stable yields for their long-term investments, but along with better governance and practices. India, given the political stability and changing business environment, will find its ranking moving up in terms of investments henceforth,” said Gaurav Karnik, Tax Partner & Real Estate practice leader at Ernst & Young.
Not only will this turnaround show the confidence in our real estate industry but will also help developers tide over the liquidity crisis seen in recent years.
Global financial institutions that are being approached for investing in India are also enhancing their investment limits owing to these changes and improved comfort level. According to a Canada-based fund, it has been approached by new limited partners to invest money in the real estate sector in India.
“We are looking at transactions mainly in residential real estate and will be committing $100 million in each of these transactions,” said a senior official of the fund.
Despite thousands of small and big realty developers across the country, the number of developers who have consistently delivered projects across all three phases of the Indian residential real estate cycle over the past 11-year period stands at a meagre 124. With this number, only few developers will qualify to be a part of global investors’ potential universe as they prefer long term players with execution track record.
“These stats also reinforce the justification behind recent policy-level interventions such as RERA [Real Estate Regulation & Development] and demonetisation. The sector definitely needs a shot of corporate governance and better industry practices and recent government moves would help in this,” Nair added.