PE players seen replacing banks as the major funding source for realty
Private equity (PE) players have replaced banks as the biggest source of institutional finance for the Indian real estate industry, even as total funding for the sector rose by 40 per cent.
The total funding increased to $5.4 billion in 2016 from $3.8 billion in 2011. This takes into account the fund flows from PEs, non-banking finance companies, bank credit and Initial Public Offerings (IPO), according to a study by Knight Frank India.
“The current environment for real estate is both challenging and opportunistic at the same time. Bank credit, which used to account for anywhere between 50 per cent and 57 per cent of the sector’s institutional funding requirement till 2014 has witnessed a sharp reduction in the last two years in the range of 24-26 per cent. Rising non-performing assets, higher risk provisioning and mounting losses in the real estate industry have led to significant reduction in credit offered by banks,” Samantak Das, Chief Economist and National Director-Research at Knight Frank India, said.
“Currently, PE funding is not just restricted to equity but has largely moved towards a quasi-equity type of structure,” he added.
Mumbai has regained its number one position in terms of attracting PE funds among all cities of India. Bengaluru continues to hold steady in terms of attracting PE investments, although its share has dipped marginally since 2013.
About three-fourth of the sector’s funding requirement is being met by PE players in the past couple of years, compared with one-fourth in 2010, the study said, adding 2015 witnessed the highest amount of PE fund flow in real estate since 2010 with more than $3.6 billion investments across over 100 deals.
A 13 per cent drop in PE fund flow was recorded in 2016 with less than 60 deals in the previous year. However, 2016 has also recorded the highest amount of the average deal size amounting to $56 million. Bank credit has shrunk drastically in the last few years from 57 per cent in 2010 to less than 24 per cent in 2016, it added.
Shortage in quality retail space and increasing rental values have attracted PE players to the retail segment in the last two years. Blackstone’s purchase of L&T Realty’s Seawood Mall and GIC’s investment in Sheth Developer’s Viviana Mall were some of the large deals during the year.