Investing Drifts in Indian Realty Market

Avadhoot Sarwate, Director & Chief Investment Officer, Nisus Finance Services Co Pvt Ltd. What are your views on the last mile funding opportunities in real estate in the present scenario? There are estimated 5 lakh housing units in stalled pro

BY Realty Plus
Published - Friday, 09 Jul, 2021

Investing Drifts in Indian Realty Market

Avadhoot Sarwate, Director & Chief Investment Officer, Nisus Finance Services Co Pvt Ltd. What are your views on the last mile funding opportunities in real estate in the present scenario? There are estimated 5 lakh housing units in stalled projects valued at approximately $ 60 bn. The NBFC crisis and the ongoing pandemic has made it very difficult for the developers to complete these projects. Moreover, post the onslaught of Covid 19 the buyer’s preference is for Ready to Move properties further adding to the liquidity woes of these projects. In short, the funding opportunities are huge but can’t be met with the traditional sources of capital. Are investors more inclined towards commercial sector as opposed to residential projects given the development risks? Over the last few years, the Indian real estate sector-residential and commercial has evolved and has investment products catering to various kinds of Investors based on their risk appetite and return expectations.

Yield seeking investors are investing in pre-leased A grade commercial offices.
Institutional Investors, pension funds like CPPIB, Blackstone are partnering with large commercial developers for developing portfolio of offices and malls.
Retail Investors are investing in commercial assets through REITs and fractional ownership platforms.
Retail Investors, Family office with a medium-term investment horizon seeking higher returns prefer investing in residential projects through AIFs. In the past, the appreciating land prices lured Investors into directly investment in residential projects. Lately, with limited or no appreciation in the land, there is shift seen from direct investing in projects to investing through AIFs to benefit from diversification and superior asset management skills of the asset manager.

I believe there is enough investor interest for both the asset classes. However, post Covid-19 pandemic the demand dynamics are changing at least in the short term. Residential market has significantly benefitted from the change in buyer preference for owning a home, reduced home loan rate and various confidence measures of the government like reduction of stamp duty, reduction of premiums etc. Whereas, the WFH phenomena, uncertainty over the resurgence of the pandemic has hampered the recovery of Offices and Malls. That being said, the investor interest continues to be strong as evidenced by the recent transactions -RMZ- Brookfield, Prestige- Blackstone, Mindspace REIT IPO. What are the challenges in execution of a stressed real estate acquisition? Crystallising the true liabilities of the project (unless acquired through an NCLT route), working with all the aggrieved stake holders of the project, ascertaining and mitigating the impact of litigations, sales and collection risk (given the negativity around a stalled project) are some of the key execution challenges in stressed Real Estate acquisition. Availability of capital is not the only reason for stressed asset situation in India. Apart from liquidity issues, delayed approvals, poor governance practices by developers and regulatory changes have contributed significantly to the current situation necessitating an active monitoring of these investments. What will be the role of AIFs in the sector going forward? Over the last few years, most Banks/NBFCs have been reducing their wholesale book and more particularly their exposure to real estate sector. The funding gap was partly addressed by the AIFs and this trend is expected to continue in future as well. There is also a realisation that traditional sources of capital funding largely funded by public deposits are not suited to fund an asset class like real estate which entails significant development risk. AIF’s which channelize investments from other private pools of capital such as PE investors, Family offices, Venture Capitals firms, HNIs have superior asset management practices to manage the risks. Success of government sponsored SWAMI fund and the track record of Real estate centric funds of providing superior risk adjusted returns to investors will greatly enhance the role of AIFs in funding the Real Estate sector.