Private equity firms eye bonanza in India's residential market

Mumbai

INDIA'S cash-starved residential real estate market is set to get a boost from foreign and domestic private equity (PE) firms, which are lining up big bets worth hundreds of millions of dollars for the sector.

The domestic residential real estate space has been in a rut for years with failed and delayed projects putting buyers off. Developers more recently have been hit by a credit squeeze as banks struggle with bad debts and a crunch in the shadow banking sector.

Private equity firms are now swooping in to buy assets at attractive valuations, say industry insiders, as regulatory changes and a more dovish monetary policy outlook bode well for the sector.

"With major impetus being given to affordable housing... PE investors are sensing a big opportunity in this segment," said Anuj Puri, chairman at Anarock, a real estate consultancy firm. "The expected 8-10 per cent annual return in the affordable segment of residential real estate is attracting not just Indian investors but also foreign entities from the US, Singapore and Canada."

Blackstone Group, one of the largest owners of commercial real estate in India, this month agreed to buy a majority stake in Aadhar Housing Finance - an affordable housing project - and committed US$112 million of additional equity to the asset.

Piramal Enterprises and Ivanhoe Cambridge, the real estate arm of Canadian fund Caisse de dépôt et placement du Québec (CDPQ), recently announced a US$70.15 million investment in Palava - a project of Lodha Group on the outskirts of Mumbai.

Several domestic real estate funds, including HDFC Property Fund and Kotak Realty Fund, are also scouting opportunities in the real estate space, according to industry sources.

And one source said that Canadian asset management firm Brookfield Asset Management is exploring roughly half a dozen residential real estate investments and it aims to nearly double its bets in the space to over US$1 billion, from US$450 million in the coming year.

The Abu Dhabi Investment Authority (ADIA), along with Hines Investments is also poised to announce an investment in the space, a source involved in the deal said.

Rising bad debts and real estate project failures have made banks cautious on lending to developers, leading to a slowdown in the property market that relies heavily on borrowing for both home building and buying.

Developers in the country were typically averse to private equity as it is more expensive funding compared to debt they could raise from banks, or non-bank finance companies (NBFCs). However, with funding from NBFCs drying up in the aftermath of a string of defaults at lender IL&FS, developers are being forced to explore debt and equity funding from private equity.

"For the PE players the valuations are probably a lot more attractive today than they were four to five years ago," said Anshul Jain, managing director at Cushman and Wakefield India. "From a risk perspective too, risk is slightly lower as some green shoots are visible in the segment. PE can see that pricing and sale pricing is at an all-time low, so valuations are at an all-time low, so it's a good time for them to enter." REUTERS