Mumbai: Institutional investment into India’s real estate sector has declined sharply in the January–March 2020 period, dropping 58% year-on-year, says JLL, India’s largest real estate consultancy firm. The decline was influenced by several events, including the COVID-19 outbreak and several high-profile issues in the domestic banking and finance sectors in late 2019 and early 2020. Total investments in FY 2019-20 has been the lowest for four years, declining by 13% to USD 4,261 million over previous year levels of USD 4,870 mn, according to the ‘India Capital Markets Update – Real Estate Perspective Q1-2020’ released today by JLL.
“The impact of COVID -19 virus has been unthinkable in its scope. Investors are expected to remain in a wait-and-watch mode, with caution and risk aversion is expected to drive the dominant behavior of institutional real estate investors over next few quarters. The year 2020 will be one of redemption, as the world recovers from one of its most challenging periods in recent history,” said Ramesh Nair, CEO and Country Head, JLL India.
Indian real estate facing immediate challenges
The impact of change in the investment climate was reflected in the asset allocation, as investors parked more funds in more secure and stable office spaces. Investments in the office sector rose to USD 2.9 billion in FY 2019-20 from USD 1.8 billion in FY 2018-19. The Mumbai Metropolitan Region’s investments share grew to 43% of national investments in FY 2019-20 from 23% in FY 2018-19.
“Ongoing financial woes, as well as an unprecedented global crisis of the pandemic, have unsettled the investment climate across the globe, including India. Investments during FY 2019-20 dipped by 13% to USD 4,261 million over previous year levels of USD 4,870 mn. The decline in FY 2019-20 has been mainly driven by a 58% fall in investments during the January–March 2020 quarter. The current situation is extremely fluid and it is still too early to provide a detailed, quantitative assessment of the COVID-19 impact on economic activity, industries, and the real estate market. However, office space, followed by warehousing, could witness the return of investments, while the residential sector is likely to revive with government support and concessions,” says Samantak Das, Executive Director and Head of Research, REIS, JLL India.
Platform funds flex as strategies diversify
As the various segments of India’s real estate sector undergo several phases of development, different investment strategies are at play to find the right balance between risk and returns. One such important strategy is the creation of platform funds. USD 8.7 billion of platform funds were announced during 2017-2019, accounting for 60% of the total funds since 2012. The warehousing sector attracted the highest interest with a 38% share of funds announced as the sector witnessed the transformation, post-Good and Service tax reform. Office sector platform funds account for the second-largest share (29%) as large investors prefer direct acquisition of assets.
Office space investors chase value-add
An emerging trend in Indian office markets sector is the shift towards investments in value-add and opportunistic deals over core assets. The analysis of core, value-add and opportunistic investments indicate that out of USD 4.4 billion invested in office space during 2018 and 2019, investors have been aggressively chasing returns as options of leased quality office spaces have reduced over the years. Further, investors are entering into joint ventures, platform deals or forward sales with more complexities to manage risks in under-construction projects.
Sovereign wealth funds pause on COVID-19 concerns
SWFs held USD 29 billion worth of assets under custody (AUC) in India as of December 2019. Real estate accounted for 22% of the AUC, amounting to USD 6.6 billion. The Union Budget had recently announced concessions for SWFs investing in infrastructure (which include affordable housing and logistics), but recent declines in crude prices may impact SWF surplus capital available for investments.
Banking sector steps up
The IL&FS crisis brought a halt to real estate lending by NBFCs/HFCs due to funding issues. A reduction in NPA levels and capital support from the government to the commercial banks has led to gradual revival in lending to the real estate sector. Outstanding bank credit to real estate developers grew by estimated INR 262 bn between March 2019 and March 2020 registering a growth of 13%.
Housing loans disbursals form a key source of fund for the real estate developers
The state of residential real estate in India is the barometer of the realty sector’s health, accounting for the major share of its construction value. The construction stage wise disbursal of home loans installments to developers form a key source of finance. Home loans disbursals grew by USD 24.6 bn while net credit disbursal to real estate developers rose by USD 3.5 during FY 2019-20. The trend in home loan growth by commercial banks, hence, forms a major source of credit for the residential sector developers.
