Capital Allocations & Fundraising: What’s new, what’s staying the same?

February 11, 2021Real Estate
 

A well-attended and engrossing first eMeeting of the GRI Club in India at the start of 2021 resulted in the following key take-aways.

What’s New?

Private equity investment will focus on assets that generate consistent returns.

Interest in investing in data centers, industrial parks and warehouses continues to increase as events during and after the prolonged lockdown in India due to the COVID-19 pandemic have shown that the nature and size of demand for these assets is going through an unprecedented growth phase.

Digitalization and increasing demand for internet connectivity has turbo charged demand for data centers, which will receive an even greater boost as the country prepares for the roll-out of 5G services towards the end of this year. Investors appreciate that the yields on cost are much higher for setting up than investing in an operational data center. However, they feel that the capital stack has to be right.

Higher equity infusion by developers is required to acquire new residential projects as institutional equity is likely to be limited due to lack of equity upside and misplaced risk reward matrix.

What’s staying the same?

Interest in acquiring leased office assets remains strongest, as in 2020, these assets exclusively accounted for 46% of the total institutional investments in India as per Colliers Research. Investors continue to be optimistic of targeting an IRR of 17-18% from the segment. Colliers also estimates that about 30 million square feet of average supply per year entered the Indian market during 2015 and 2019. Most of this stock has been snapped up institutional funds. Over the next five years, similar level of supply is likely to enter the market, but the availability of investment grade stock is shrinking rapidly, and some investors are looking at also assuming some development risks. Markets are conducive for forging equity partnerships, platform deals and project level joint ventures.

Meanwhile, developers of residential projects are looking at any kind of funding – be it debt or equity or a mixture, since liquidity remains a key challenge as sales have slowed down considerably. Considering a large debt portfolio of over USD20 billion remains invested in mainly residential real estate by non-banking finance companies, there is significant emphasis on stress resolution. Portfolio buyouts of existing investors are a good opportunity for funds focusing on credit to provide liquidity to existing investors and ensure project completion. However, they are not keen on projects in central locations as their land coasts may be as high as 30-50%. Finally, an interesting quote in the meeting was - “Everything is equity, even debt.” This basically means that investors and funds have to keep in mind that even if they provide debt to developers for projects, they need to be consider that they may need to assume some development risks as the housing markets will still take a while to recover. Hence, we can expect more consolidations to take place as the stronger and more professionally managed developers take over projects that are stuck.