Riding India’s regulatory tide

Sanjay Dutt, chief executive officer for India operations at Ascendas-Singbridge, says the country’s fast-evolving regulatory regime will drive investors toward greater engagement with its real estate industry

India’s real estate market is currently dominated by domestic investors taking credit positions and international investors assuming longer-term equity stakes. But whether domestic or international, investors in general are taking comfort in a regulatory regime that should, on net, be supportive to the country’s property investment sector. Sanjay Dutt, chief executive officer for India at Singapore-based real estate investment manager at Ascendas-Singbridge, tells Arshiya Khullar all about it.

PERE: How are domestic investment firms capitalizing real estate strategies in the country right now? 

Sanjay Dutt: Investments in Indian real estate right now are being made by either the country’s domestic private equity funds or non-bank financial companies. Rising non-performing assets, higher risk provisioning and mounting losses have led to a significant reduction in credit offered by banks. They have been reluctant to lend to developers, partly because of their own ongoing issue with NPAs as well as the execution risks that builders are facing right now. Banks lent builders $1.3 billion for under-construction projects in 2016, down from $4.4 billion in 2013. In the same period, investments by Indian private equity funds and NBFCs shot up to $4.6 billion from $900 million, according to KPMG numbers. Evidently, NBFCs and private equity firms are increasing their exposure to real estate and expanding beyond residential projects, too. This shift from banks has happened over the last three to four years.

These investors and capital lenders have largely favored debt or structured debt funding since the banks lowered their exposures to the real estate. However, the scenario is now changing, as the returns on these debt positions are diminishing and the challenge will become bigger as developers shy away from high-cost debt. And so, private equity funds are looking at ways to increase their risk appetite as pure debt opportunities will not be available with good established brands. The solution won’t come in the form of listings, though; the initial public offering route, which was one of the preferred channels of fund raising in 2010, has vanished in recent years due to the poor capital-markets credibility of the companies operating in this sector.

PERE: Are international investors thinking about Indian private real estate differently? 

SD: The strength of the Indian economy and its favorable demographics, coupled with the introduction of several growth oriented reforms including the Real Estate (Regulation and Development) Act, 2016; Real Estate Investment Trusts; the Goods and Service Tax; and the relaxation of foreign direct investment norms are aiding the real estate sector to attract higher investments from offshore.

The offshore investor base is on the rise as new sets of investors, including pension funds and sovereign wealth funds from countries such as Canada, the Netherlands, Qatar and Singapore are increasing their exposure to Indian real estate.

Reading tea leaves

Ascendas shares its predictions for the Indian private real estate market in the year ahead

Maiden REIT: The country expects to see its first REIT in early 2018, providing a long-awaited exit strategy for investment funds now active in the market or thinking of entering.

Government backed residential drive: Affordable housing projects were granted ‘infrastructure status’ by the central government in early 2017, providing access to lower financing costs and tax exemptions, and boosting interest from institutional investors.

The GST factor: The goods and service tax’s implementation will see more institutional transactions in warehousing and logistics sector, along with quality retail space.

Data center development: The property type’s specialist nature is now seen as an asset because it keeps away the competition – especially local developers. Those same barriers to entry mean it is also difficult to execute, however.

As per KPMG numbers, total annual investments into Indian real estate from foreign investors have consistently outpaced their domestic counterparts in the last couple of years. While India’s private equity funds continue to be bullish about the country, there is a growing interest from foreign pension funds and sovereign wealth funds, which have more than doubled their investments in 2017, accounting for a nearly 60 percent share, or $3 billion, of total investments.

Investment since 2016 by foreign funds has mostly been in commercial assets such as office space, warehouses and retail. However, investors from Hong Kong as well as Indian domestic institutions have largely allocated capital toward residential projects. While pension funds have been primarily interested in taking up warehousing, retail and to some extent office assets; sovereign and pension funds emerged as the biggest investors, accounting around 80 percent of the total investments in 2017. Sovereign funds invested in the office market while pension funds were split between retail and industrial/warehousing assets.

There has been a pragmatic shift in international investors’ focus toward pre-leased office spaces, industrial and warehousing and retail real estate projects. Interestingly, this has come at the cost of residential investments due to poor execution, a lack of clarity on approvals and appalling returns from residential projects. The share of private equity investments into residential projects declined from 50 percent in 2011 to 28 percent in 2016 and further dropped to a meagre 4 percent in 2017, although we expect this to change with the Real Estate Regulation Act being implemented now.

The office market, which accounted for 29 percent of private equity funds in 2011, today stands at almost two-thirds of investments into Indian real estate. The share of warehousing in total investments increased from 9 percent in 2011 to 16 percent in 2017. And since 2016, platform deals have been on the rise too: such platform level deals will continue going forward and play a key role in the Indian real estate story.

PERE: What is Indian regulation doing to allay fears international capital might have about investing in India’s commercial property sectors?

SD: Recent structural changes like the implementation of RERA, GST, REITs and relaxation of FDI norms have brought increased transparency, governance and organized operations to the real estate sector. India’s economy has been solid in its foundation, and factors such as stable government, positive economic outlook and several government reforms for ease of doing business have helped build confidence among foreign investors, enabling them to increase their exposure to the real estate sector.

India’s logistics sector, for example, has recently been the target of an investment boom, largely due to tax reforms. In addition, retail assets also are now a popular play, with a number of platform or portfolio deals either already completed or in the works.

GST implementation has removed inefficiencies and opened up the logistics sector to be developed across the country. This has unleashed a torrent of incoming investment. More than $2.5 billion dollars of foreign money has flowed to Indian warehousing and industrial real estate, and more is coming. Numerous prominent private equity firms and regional developers have already conveyed their intentions to develop large modern warehousing across the country.

A revival into the residential sector is also expected with RERA being implemented and that may see private equity return. Capital flows are expected in particular in affordable housing and financing of projects at the pre-construction stage. Looking ahead, RERA will drive consolidation in that space in 2018. Only financially sound developers will survive, while smaller or highly leveraged companies will likely resort to asset sales to shore up liquidity. Unsold inventory may fall in 2018 as most developers will focus on completing their property projects to comply with RERA.

Overall, investment volume in real estate is at the highest level of this cycle – and possibly ever. In the last 12 months, close to $6 billion of income-producing assets and development sites transacted with most of this investment coming from cross-border investors targeting India. The transactions were in office parks, malls, industrial spaces, however minimal exposure was taken in residential space. Per capita, India is underserved in all these forms of real estate, and therein lies its attraction.


This article is sponsored by Ascendas-Singbridge. It appeared in the February 2018 issue of PERE magazine.