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Business Note

Published on: June 28, 2020, 10:42 p.m.
Real concerns
  • In the slow lane. Photo credit: Sanjay Borade

By Arbind Gupta. Assistant Editor, Business India

The ongoing Covid-19 crisis has taken its toll on the inflow of private equity (PE) investments in the Indian realty market. Investment activity during the first five months of CY20 has dipped 93 per cent (y-o-y) to $238 million (across just five deals with an 80 per cent drop), according to the ‘Investments in Real Estate’ report launched by Knight Frank India.

Apart from the pandemic, the report has largely attributed this decline to the slowdown in the Indian economy in 2019.

The global real estate consultancy is of the view that the sharp slowdown in the domestic economy and specifically the real estate sector will keep investors cautious. Moreover, international funds reorienting themselves to attractive opportunities in developed economies on account of a drop in valuations due to recession would cast its shadow on the PE investments in Indian real estate in 2020.

“The recall of undeployed capital by sponsors, the emergence of attractive opportunities globally, increase in risk premiums, contraction in Indian GDP and Covid-19 related uncertainties would cast its shadow on the investor sentiment and we expect the investor activity to be subdued in 2020,” says Shishir Baijal, chairman & managing director, Knight Frank India.

Baijal is of the view that of all real estate asset classes, the warehousing segment would be the fastest to recover followed by the office space. With pay cuts and job losses becoming pervasive, the residential and retail segments would have to chart an arduous journey towards recovery.

“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 during the current year,” adds the Knight Frank India chief.

Investment via debt

As per the report, PEs have been taking equity positions in rental-yielding commercial assets (office, retail and warehousing) and their share in overall investments have surged compared to that in residential which involves greater risk. In the residential sector, PE investors have increasingly turned toward investment via debt or structured debt instruments in an attempt to shun the risk associated with investing equity in development projects.

The global RE firm forecasts that the year 2020 would 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,” adds the latest report.

Private equity investors have invested over $7.3 billion in the Indian warehousing industry in the previous decade with 78 per cent of the investments going towards creating new assets. The $ 5.6 billion worth of investment, which has gone into new developments, is expected to create over 300 million sqft of warehousing space in the coming years. In 2020, only two deals were concluded, suggesting an overall investment volume decline in warehousing space due to Covid-19 induced lockdown. However, the adverse impact of the pandemic on the warehousing segment will be relatively less compared to other asset classes.

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