Funds dry up for real estate sector; IL&FS, NBFC crises drag down sector

PE inflows accounted for more than $ 2.1 billion during January-June 2019, whereas 0 million came in from non banking financial companies (NBFCs) and housing finance companies (HFCs).

A clutch of factors, including the recently concluded Lok Sabha elections and RBI tightening lending norms for NBFCs and HFCs, impacted investments in real estate during the January-June period in the current calendar year (CY). Institutional investments in the sector fell 31% y-o-y to $2.2 billion during the period, a report by Anarock said.

However, a majority government taking charge at the centre in May 2019 helped revive the sentiment a bit with private equity (PE) players pumping in $580 million in June, the real estate consultancy said in a report.

Shobhit Agarwal, the managing director and CEO at Anarock Capital said, “A majority government at the Centre is gradually reviving private equity’s confidence in Indian real estate, especially the commercial sector. Anarock research indicates that PE players infused $580 million into Indian real estate in June, immediately after Modi 2.0 took charge.”

However, the general elections predictably cast a shadow on funding. Total inflows witnessed a yearly decline from $3.2 billion in H1 2018 to nearly $2.2 billion in H1 2019. Also, the IL&FS default last year and RBI’s tightening norms for NBFC and HFC lending to real estate had a severe impact, he added.

PE inflows accounted for more than $2.1 billion during January-June 2019, whereas $140 million came in from non banking financial companies (NBFCs) and housing finance companies (HFCs). This is against PE funding of around $2.6 billion in H1 2018. Funding from NBFCs and HFCs declined significantly by 73% y-o-y to $140 million from $520 million during the same review period.

During H1 2019, over 89% of funding was through equity, while the remaining 11% was from debt. During the same period last year, equity funding had a 83% share while debt stood at 17%.

In January-June 2019, Mumbai attracted the maximum (24%) of the overall inflows amounting to $530 million followed by Pune with nearly $250 million coming in from institutional investors – an increase of 97% for Mumbai’s immediate neighbour since H1 2018.

A breakup of the inflows during January-June 2019 reveals that commercial real estate attracted the highest 64% of inflows amounting to more than $1.4 billion, followed by residential real estate ($270 million), retail real estate ($260 million). The logistics & warehousing segment attracted nearly $200 million.

Even while caution prevails over the current market dynamics, the incumbent government’s proactive initiatives across sectors will doubtlessly cause more PE inflows into real estate. While commercial real estate’s overall attractiveness for institutional funds is now well-established, the residential sector is also likely to become increasingly interesting in the back of government’s determined push to affordable housing, Anarock said.