Realty segment in India is witnessing new reforms which has strengthened its backbone in a way and enhanced the investor’s interest with rise in transparency of its operations. It has been recently exposed that 75% of the India’s real estate sector’s funds are propelled by Private Equity (PE).
This share was merely at 25% in 2010 which has observed a three-fold rise in last 7 years. Funding from Non Banking financial companies (NBFC), capital markets and PE together constitutes 40% of the total funds inflow in the Realty sector in 2016. This total investment by these players was around $3.8 billion in 2011 which arose to $5.4 billion in 2016. These facts are revealed in a report by Knight Frank India.
The greater participation by the PE is expected with a view of market forces and regulatory forces within segment. Even Banks accounted anywhere between 50%-57% till 2014 which has been slumped down to 26% by 2016. A major chunk of foreign investment is attracted in real estate sector in India after creation of public markets in the form of REITs (Real Estate Investment Trust) for commercial assets and selling off non-performing assets by banks.
Since 2012, debt or structured debt financing is largely favoured by these investors and account for 33% of such transactions. But now PEs are moving towards greater equity ownership. With the fall in interest rates, debtors are in a phase of avoiding high-cost debts; hence, the returns on these debts are diminishing. In fact pure debt opportunities are not available be established brands thus paving a way for PE funds. In order to achieve higher returns, pure-equity or quasi-equity positions are the way out.
Evaluation of the security values was dependent on the cash flows and capital rates, in order to determine the secured debt positions. Now this trend is gearing up for a reverse where PE players will revisit the drawing boards to determine their participation in realty sector.
As large developers are seeking quasi-equity funding, small developers still prefer structured debt as first choice. The current real estate market scenario is not just challenging but opportunistic as well. Just 1% of total private equity participation was witnessed at entity level in 2016 which has been slashed down drastically compared to 2014 and 2015 where level of entity participation was 16% and 30% respectively.
From last two years, even the bank credit has observed a sharp decline for real estate sector. The reduction of bank credit is on account of mounting losses, rising non-performing assets and higher provisioning. In 2010 Initial Public Offering (IPO) was one of the preferred channel of fund raising which is also kicked-off gradually due to poor market credibility of the companies operating in real estate industry.