India introduced REIT legislation in 2014 and has been honing the regime since then. The first REIT IPOs are expected to hit the market in the final quarter of this year and a trust sponsored by Blackstone Group and Indian developer Embassy Group is widely predicted to be the first to launch. Canada’s Brookfield is also tipped as a potential REIT sponsor. In June, India’s IIFL Holdings said it had registered a REIT with the Securities and Exchange Board.
In the longer term, REITs will offer huge potential as an exit for private equity investors. PERE data show that India-focused private equity real estate funds raised $8.27 billion between 2013 and 2017, with more capital allocated from regional and global strategies.
While India-based developers and, to a lesser extent, private equity investors have focused on the residential development space, overseas private equity has focused on commercial real estate, especially the business park sector. Cushman & Wakefield (C&W) research estimates that 67 percent of investment in India’s office sector between 2008 and Q1 2018 came from overseas investors. In that time, the top investors in the office sector were Blackstone, Brookfield and The Xander Group. C&W estimates $2 billion was invested in the office sector in 2017 by foreign funds.
Looking ahead, C&W expects more investment in the office sector and new entrants to the market. For example, South Korea’s Mirae Asset Global Investments plan to invest $500 million in the office and residential sectors. Meanwhile India’s ICICI Prudential Asset Management and Indiabulls Asset Management are both raising office funds.
In the past three to four years, India’s retail sector has attracted private equity interest, with Blackstone, APG and other overseas players acquiring assets and forming platforms. The sector had been plagued by oversupply and there is still a gulf between the performance of good malls, where average vacancy is only around 5-10 percent, JLL research suggests, and secondary malls, where vacancy could be 25-35 percent.
India is in the early stages of developing a modern warehouse market and private equity firms, often sector specialists, are becoming more involved. Canada Pension Plan Investment Board-backed Indospace is raising a $550 million third fund, while Logos India launched an $800 million vehicle for logistics development. India’s Milestone Capital Advisors is also seeking to raise an industrial and warehouse fund.
A legislative boost
Both the retail and logistics sectors, and indeed real estate overall, have benefitted from a raft of legislative changes introduced by the Modi government. Earlier this year, the government allowed 100 percent foreign direct investment in single brand retail, which is expected to boost the number of overseas brands in India. A nationwide goods and services tax (GST) has also been introduced. This replaces a range of taxes levied by Indian states, which had made movement of goods across the nation difficult. With this barrier removed, India can now develop a national logistics market, which will in turn boost retail.
Number of India-based funds in market
Capital targeted by India-based funds in market
The Real Estate (Regulation and Development) Act 2016 was introduced to protect homebuyers and to help boost investments in the real estate industry. It consists of a number of measures designed to improve transparency and professionalism. However, the measures outlined in the act have not yet been fully implemented. For example, of the 25,000 real estate projects now registered as required by the act, 62 percent of these are in a single state.
Affordable housing a national priority
In 2017, India granted ‘infrastructure status’ to the affordable housing sector, underscoring its importance. India faces an affordable housing shortfall of 18.8 million units, enabling banks to lend more and at cheaper rates. This is expected to lead to more investment in the sector from domestic and overseas private equity. HDFC Holdings is raising a second affordable housing fund and has formed a $1 billion platform with Abu Dhabi Investment Authority to invest in affordable and mid-market housing. However, Indian media reports earlier this year suggested banks were still not lending significant capital to affordable housing projects.
As in other markets around the world, more interest is being shown in niche property sectors such as data centers, senior living and student accommodation. Last year, Goldman Sachs bought a 75 percent stake in Yoho, a student housing platform.
India’s currency has been depreciating against the US dollar since 2013 and fell to a record low in mid-August, amid rising oil prices, India’s increasing trade deficit and wider concerns about emerging markets in the wake of increased US tariffs on imports. Reports suggest the weaker rupee is encouraging non-resident Indians to invest in property although they and other potential investors may be deterred if the currency continues to slide.