PE investors shy away from residential property

Kolkata: Facts first. Between January 2019 and March 2019, PE funds like HDFC Venture, Piramal Fund, Kotak Realty, JM Finance together invested Rs 182 crore in Adarsh Developers’ residential project in Bangalore, KKR invested Rs 102 crore into Embassy Group’s commercial project in Bangalore, Kotak Realty put in Rs 5.66 crore in Shriram Properties’ Kolkata residential project and IFC invested Rs 30 crore in Signature Global’s residential project in the NCR.

These encouraging facts notwithstanding, sector analysts think that country’s residential space has fallen out of favour with the PE funds for more reasons than one, the most important being uncertainties.

“The long-pending enactment of the Real Estate Regulation Act (RERA) drew clear regulatory lines for the housing market - for the very first time in India. Unregulated developers had to fall in line, step out of the game or merge with more organised players. The rebooted Benami Transactions Act closed another gaping loophole, making unregistered property purchase and ownership impossible. The application of the unified General Service Tax (GST) to replace all other previous taxes related to residential property purchase added another layer of regulation, resulting in increased complexity as well as increased cost of acquisition for most unfinished projects. 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,” said Anuj Puri, Chairman, Anarock Property Consultants.

Going by a recent study by Anarcok, between 2015 and 2018, the share of private equity investments in the residential sector reduced from 47 per cent to a mere 3 per cent. Concurrently, commercial real estate saw a significant rise in PE investments. Total private equity inflows in residential stood at $266 mn in 2018 - an 82 per cent decline since 2015.

In short, PE investors have been steadily drifting away from the residential sector and are increasingly focused on the commercial office segment. Office spaces—particularly in CBD and SBD areas—have gained significant momentum over the last four years.