During the second quarter, India’s property market hit a new milestone. According to a report from real estate services firm Cushman & Wakefield, private real estate equity investments in the country reached INR 74.1 billion (€986 million; $1.1 billion), up approximately 16 percent from the first quarter, marking the highest quarterly investment in the country since the onset of the global financial crisis. The report attributed the seven-year high to “increased investments in the residential sector and continued investments in yield-generating leased office assets.”
At first glance, the data appears to be positive news for the Indian real estate market, but there is less cause for celebration upon closer inspection. Although the data includes both domestic and foreign private equity investments in India, much of the volume is currently dominated by domestic capital, not overseas. As a number of real estate professionals explained to PERE, domestic fund managers continue to find it challenging to raise capital from foreign investors for traditional commingled private equity real estate funds. Many foreign investors instead prefer to make debt investments or invest in project-specific deals or in the company itself, they said.
“The market is going from bad to worse from 2012-end to now, “said Amit Bhagat, chief executive officer and managing director of ASK Property Investment Advisors. “Today, the industry needs equity and long-term patient capital. The problem is that there is no equity [from foreign investors] available at all.”
Of the total INR 74.1 billion invested in the quarter, the bulk of the capital – approximately INR 48.5 billion – was invested by domestic private equity real estate funds. And despite a 44 percent increase in the total number of deals, only five of the 23 transactions were made by foreign private equity funds. These include both direct deals as well as fund investments made by foreign institutional investors, as per the terminology used in the report.
The domestic deals are mostly being funded by capital raised from local retail investors and high-net-worth individuals. Favorable regulatory guidelines, among other factors, has made it possible for equity fund managers to attract more domestic investors. For instance, PERE has learned that ASK Property Investment Advisors is understood to have raised INR 10 billion for its INR 15 billion domestic real estate fund and is targeting a final close before the end of the year.
“Two years ago, SEBI legislated a minimum investment size of INR 1 crore. At that time it was scary for domestic capital. It was later removed and now smaller ticket sizes are permitted,” explained Sanjay Dutt, managing director, India for Cushman & Wakefield.
In contrast, foreign institutional investors and fund managers are approaching India with a more cautious stance.
“They are being very selective,” said Bhagat. “Institutional investors now find it better to allocate to an emerging market fund or a fund-of-funds rather than directly participating in India.”
International firms also are choosing alternatives to traditional blind-pool funds. One Mumbai-based fund manager, who did not want to be named, remarked that the private real estate equity investment referenced in the Cushman & Wakefield report should be more accurately termed ‘structured debt investment,’ since most foreign capital in India’s real estate sector is coming in as debt. “Lenders now are borrowing even for payment of interest,” the manager said. “The internal accrual is not supporting their plans to launch or construct their projects, so there is no option but to borrow more via an NBFC (non-bank financial institution) or as structured debt.”
Last month, reports in the local media suggested that Kohlberg Kravis Roberts’ India private equity investing arm is plotting the launch of an INR 15 billion alternative investment fund specifically to offer credit solutions to Indian companies.
Two entity-level deals were also announced last month: Goldman Sachs’ $150 million investment for a minority stake in Piramal Realty, the real estate development arm of the Mumbai-based conglomerate Piramal Group; and Warburg Pincus’ $284 million investment for another minority stake in the same developer.
India’s pro-reform government that came into power last year has undoubtedly created a positive sentiment around the country’s property sector. Foreign private equity real estate investors interested in the market, however, have yet to get fully comfortable.