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PEs Switch Focus to Entity-level Investments in Indian Realty
The Economic Times  |  May 13, 2019

Kailash Babar & Sobia Khan Mumbai & Bengaluru

Institutional investors, especially private equity (PE) firms, are gradually moving towards entity-level investments from project-level exposure. The PE funds pumped in up to $3.3 billion into the Indian real estate through entity-level investments in 2017-18, showed the data obtained from Anarock Property Consultants.


This is three times the amount — $1.1 billion — invested by them in 2015 and 2016. The share of PE funds’ entity-level investments into Indian realty rose from 22% in 2015 -16 to over 39% in 2017-18.


“This is significant given the present cash-crunch in the Indian real estate sector. Longer-term funding can help developers address long-term issues rather&hellip The increase in entity-level investments imply increasing confidence in developers with high corporate governance scores,” said Shobhit Agarwal, MD & CEO, Anarock Capital.


Over the last couple of years, the Indian real estate has witnessed marquee international institutional investors deploying capital through such entity-level transactions. Singapore’s GIC invested $1.39 billion in DLF’s rental portfolio, Blackstone invested $730 million in Indiabulls Real Estate, while Canada Pension Plan Investment Board (CPPIB) invested $500 million in Indospace.


While entity-level investments by PE players come at the cost of lower returns and higher due diligence requirements, they are of greater overall value for the real estate market in general and developers and private equity players in particular.


At the peak of real estate cycle in 2007, investors were investing all across — largely at the project level — as the picture looked rosy then.


However, after the Lehman Brothers crisis in 2008 and up to 2014, they turned more ive. They refocused on developers with good past track records, and with whom they felt comfortable.


Despite this new focus on comfort and credibility, private equity investments remained limited largely to the individual project level. This approach was very much in evidence in the 2015 to 2018 period, wherein around two third of private equity investments in Indian real estate were at the project level. Of the total $14.01 billion private equity funds in Indian real estate over the last four years, more than $4.4 billion were infused at the entity level.


A deep dive into data reveals that the focus on portfolio or entity-level investments picked up momentum in the latter half of the period between 2017 and 2018. In this period, entity-level private equity inflows almost tripled compared to the previous two years.


“Indian real estate is now offering improved transparency and confidence to institutional investor in the back of new regulatory approach and policy regime. Developers are operating in a completely new environment and their approach has also seen a transformation. Macro-economic indicators have also turned positive on many counts including IMF’s forecast of India’s GDP growth rate,” said CEO of a real estate company that has also recently concluded an entity level deal with a fund.