The primary factor driving PE investments is the expectation that the economic environment is set to improve, which would result in a rise in property prices.Developers have been quick to catch the changing market sentiment that is looking positive after several quarters of pessimism. While home buyers are still showing caution and staying away from the enquiry counters, developers have found another route to get the unsold inventory absorbed.

The changing outlook has seen the entry of private equity (PE) investors who are looking for big-ticket purchases and quite a few have lapped up the entire lot of unsold units in several projects. The advantage for the investor is that he gets a handsome discount from the developer, and then aims for good capital gains over the medium- to long-term. The developer also benefits as he has found an opportunity to liquidate the asset that generated little return for him and can focus on fresh investments.

PE funds back

PE funding had dried out over the last few years on account of weak economic activity, poor shape of the real estate industry and slowdown in the end user demand. However, since the beginning of 2014, there has been renewed interest from this segment of investors.

The primary factor driving PE investments is the expectation that the economic environment is set to improve, which would result in a rise in property prices.

A recent report by Cushman & Wakefield (C&W), a global real estate consultancy, showed that in the first quarter of calendar 2014 the private equity investment rose by 2.5 times over that in same quarter last year. The investment figure for the quarter ended March 2014 stood at 2,800 crore and was almost 30 per cent higher than that in the previous quarter ended December 2013.

Industry sources say that the activity witnessed in the first quarter of the calendar year is also continuing even in the second quarter and the pipeline of such investment looks strong both in the commercial and residential space. While in the residential space the investors are looking for a good bargain to benefit from capital appreciation in future, in the commercial space they are looking to buy pre-leased property.

“PE funds buying into residential property are getting discounts of 20-30 per cent from the developers and therefore are investing for capital gains to be had in future. In the commercial space they are not looking at empty space as there is leasing risk so they are targeting pre-leased property where they get both annual return of up to 9 per cent along with long term capital appreciation,” said Ravi Ahuja, executive director, Cushman & Wakefield.

Developers are not looking for empty commercial spaces as they are not sure for how long they may not get a lease and hence there is a risk on buying them.

“The benefit for PE investors is that there is no project risk as the project is completed and the timing is also right for them as the demand environment is expected to improve going forward making their investments worthy. Since they have the cash, they can benefit from the opportunity,” said Neeraj Bansal, head, real estate and construction, KPMG.

Among the recent deals that have been concluded, PE funds Xander Investment, Kotak Realty, Peninsula Brookfield and Blackstone have invested an aggregate of almost Rs 1,100 crore in four projects across Mumbai, Bangalore and Chennai.

“Private equity investments in completed residential projects have crossed few $100 million over this year and the pipeline is increasing. Blackstone and Brookfield Asset management have been on a buying spree in the Indian real estate,” said Shobhit Agarwal, MD, capital markets, Jones Lang LaSalle.

While IndiaReit is among the few PE players that are aggressively looking out for attractive deals, sources said that Milestone Capital Advisors is close to buying several apartments of Assotech Realty’s project in Gurgaon. “The funds are looking for hefty discounts in the residential space and there is a rush for pre-leased assets,” said Ahuja.

What’s in for retail investors?

While there are significant discounts to be had for bulk investors from various developers, however, not everyone is selling. It is only those who are over-leveraged and are facing liquidity issues that are looking to extend the big discount in order to attract a big investor and sell in bulk.
While retail investors can also avail discounts of around 10 per cent in the market, experts say that more is on offer to the bulk buyers as they are looking to cut down on losses as early as they can. “While the PE guys are getting higher discount, retail buyers having cash are also getting good deals in the market both in the medium and luxury segment,” said Bansal.

“The market is not offering an optimal sales velocity to the developers and that is encouraging them to deal with a bulk buyer. There are discounts on offer to the retail buyer too but since the developers are looking to monetise their assets it makes it easier for them to deal with a bulk buyer,” said Agarwal.

While there is a visible activity from the PE investors in the realty sector, experts feel that the future of the sector is bright as the dust around uncertainty has settled down and the new government is also settling down. The initial steps that they have announced for the real estate industry in the budget and post budget have been to provide the necessary fillip to the industry.

Experts say that while money is flowing into completed projects there is a possibility that once the economic activity picks up the money will also flow into ongoing projects that need funds for completion.