Capitalizing on the Regulatory Opportunities!

The dominance of institutional funds in the country’s investment market signals their long-term confidence in the country’s growth prospects.

10 Aug 2018

By Nikhil Bhatia

Building Human Capital Strategically

While India stands as one of the most vibrant global economies due to its robust banking and insurance sectors, the real estate sector plays a critical role in ensuring this position. Despite the past two years being a mixed bag for real estate developers and industry as a whole, 2017 came through just in time with initiatives like RERA, easing of FDI norms and GST implementation. Speaking purely from an investment regulatory standpoint, these initiatives did not only promise increased transparency and enhanced consumer and investor confidence in the sector, but also resulted in significant interest from offshore equity investors, large Indian corporates and HNIs. And thus, opening doors to a much-needed opportunity for the sector to further solidify its position in aspiring for more aspirational targets.

The dominance of institutional funds in the country’s investment market signals their long-term confidence in the country’s growth prospects. With quality assets being available in core and core-plus locations, investment activity in the segment has continued to be busy thus far. Not only has the sector seen high levels of investment activity in office, residential and retail segments, there has been active interest in the warehousing segment as well. The cost and availability of funding have further eased up for the sector. While structured finance continued to be a viable source of funding, the pure equity play is slowly but steadily making a comeback, especially for the larger, established players.

The promise of 2018 has kept us focused on what we’re aiming for and how to get there. Following a slew of favourable trends, so far, the industry has positively delivered on what we expected.

With the availability of well leased assets across core locations, PE investments in core assets are continuing to flow. Yields have been stable, solidifying the position of core assets for investors. Developers are particularly keen on the commercial segment and have been displaying increased interest in commercial projects. The reason behind this is that the office sector continues to maintain its growth momentum, with an anticipated absorption of 40 million sq. ft by the year end. The combined effect of RERA and REITs is leading to better compliance as well as standardization of space, resulting in the emergence of more investment-grade office space. While investors continue to invest in completed assets, a key trend over the past year or so has been selective development equity.

Presently, consolidation among developers as well as large land owners is being driven by subdued market conditions, with smaller players looking for avenues for funding or resorting to asset monetization. Credible developers are benefiting the most as a majority of land owners (and smaller developers) are entering into joint development agreements and development management structures with well-capitalized, credible developers and corporate players. Corporates keen on monetizing their land assets and smaller developers looking to retire debt are also bringing attractive land deals to the market. In addition to transactions for the residential segment, the land market is offering opportunities for office, retail and industrial developments. The time could not be more opportune than this!

Compared to the past couple of years where debt remained the dominant flavor, there has been a selective but incremental appetite for equity as a source of funding. Especially through 2017, various equity platform deals have been seen in the real estate sector. The focus of equity investments is no longer only on returns/IRR. It is quality of the asset that is now an overriding theme. Various listed players have raised money successfully through QIP & Institutional placements during past few months. Over the coming months, strong track/performance record and corporate governance will play a critical role in gaining investor trust and funding.

The current environment for real estate is both challenging and opportunistic at the same time. Traditional bank credit has also evolved with housing finance companies as well as Non-Banking Financing Companies (NBFCs) providing lease rental discounting loans to real estate players. The NBFCs have been sweetening the deal by offering LRD with added flexibility for developers in terms of both serving and repayment. While the expectation is that such investments will continue making inroads into the real estate segment, lending from the traditional banking sector is likely to come with some caution, resulting in the tightening of the sector.

While office and residential segments have remained the traditional investment drivers, alternative sectors such as retail and warehousing have also come to the forefront. With the implementation of GST, the warehousing sector has attracted interest from domestic as well as national players, resulting in the emergence of better quality, investment-worthy assets.

So, what should the industry expect in the remaining half of 2018?

  • Enhanced transparency enabling a more secure environment for investors and better exit opportunities.
  • Average ticket size of investments is to increase; while the office segment continues to attract interest, warehousing and retail segments are also envisioned to gain momentum.
  • Focus on corporate governance to be key in attracting funding; equity to witness incremental interest.
  • Investor focus to remain on the quality of assets; core and core plus assets would also generate significant interest.
  • Easing and streamlining of regulatory environment will be key to attracting and sustaining investor interest and confidence.

Slowly but steadily, we’re pacing towards the five-pronged assurance. What’s in store for us next will only further strengthen our position!