Inarguably, the Indian real estate vertical that in the direst need of funding is the residential sector. In a perfect world, the private equity that is now pouring into the country's realty sector would focus on where it is needed the most. However, PE firms have their own investment rationale, and Indian residential real estate has been far from attractive to them.
There are sound reasons for this. The Indian residential sector has been hounded by multiple problems for the last 3-4 years. These include the issue of stalled/delayed projects, liquidity crunch, and high property values despite weakened demand and slow sales.
The country's housing market has also seen the highest impact of policy-induced disruptions. Given the fact that the housing market was tainted by malpractices and lack of customer-centricity by developers, the Government had to step in with policy interventions squarely aimed at cleaning up the sector.
The inevitable fallout of demonetization (DeMo) on an industry which was 'thriving' on black money aside:
While all these measures were arguably essential for the long-term viability of the Indian housing sector, they resulted in a lot of uncertainty. Private equity players are highly averse to uncertainty, so it is not surprising that the residential space has fallen out of favour with them.
As per ANAROCK data, between 2015 and 2018, the share of private equity investments in the residential sector reduced from 47% to a mere 3%. Concurrently, commercial real estate saw a significant rise in PE investments.
In short, private equity investors have been steadily drifting away from the residential sector and are increasingly focused on the country's commercial office segment. Indian office spaces - particularly Grade A projects in CBD and SBD areas - have gained significant momentum over the last four years. Also, the Indian commercial real estate segment has historically been far more transparent and predictable than the residential sector.
In Q1 2019, the country's housing sector saw private equity PE inflows of USD 143 mn out of the total USD 1.1bn PE investments. However, it seems likely that the tide is turning - thanks largely to the significantly increased momentum witnessed in the affordable housing segment. There is now a vastly improved business rationale for such housing emerging among institutional investors.
Also, niche residential segments such as student housing and co-living are seeing massively increasing demand. These sub-segments have a lot of potential to attract PE investments. Already, a number of organized players, including start-ups, are venturing into them.
Unsold Inventory - The Main Obstruction: While the rise of niche residential sub-segments is certainly part of the revival story for PE inflows into residential real estate, PE investors need confidence boosts at a macro level, as well. This naturally involves clearing enough of the pent-up unsold housing inventory of nearly 6.65 lakh units across the top 7 cities.
Housing sales did see a 12% increase in the first quarter of 2019. This heartening rise is primarily because GST rates as well as repo rates were reduced, but also because a lot of the new housing supply hitting the market is in the affordable category.
Reviving consumer confidence will result in consistently improving housing sales, which will play a major role in attracting more PE investments into the Indian residential sector. It goes without saying that the industry's fingers are crossed for better times ahead.
Anuj Puri, Chairman of ANAROCK Group is a highly respected industry authority and thought leader with 30 years' experience in leveraging Indian and global real estate opportunities. His company ANAROCK has a staff complement of over 1800 qualified and experienced professional, with offices in all major markets in the country, dedicated services in Dubai and a global footprint with over 80,000 preferred channel partners.