From being ‘Alice’ in Wonderland to becoming ‘Bridget Jones’ – without her famous Diary of course - real estate sector has long been living in its own ‘Indian Dream’.
In fact, till date, it has not been given the due credit of being a true Nation-builder, by giving it membership to the elite “Infrastructure” club. Even while the sector is the second largest employer after agriculture and single-handedly contributes 5-6% to Indian GDP, Indian Real Estate faces larger challenges from within than outside - and this is when it is poised to grow at 30% over the next decade.
The fact is that global factors like rate rise in the US or slowdown in China or subdued commodities trade has never affected the Industry the way factors intrinsic to India - like policy logjam, tax disadvantages and access to unorthodox sources or platforms of capital has affected it. A sector which has always craved for ‘sustainable and long term’ capital; but has long been fed on a diet of ‘short term and dearer’ funds - trapped in a perpetual cycle of cash flow mismatches, ever reducing capacity to execute and deliver, non-compliance of end use of funds and lack of corporate governance – all of which lends credence to its ‘Bad Boy’ perception. Has it reached a stage where there is no going back?
Yet the counterweight to such real concerns is that local economies are showing slow yet steady growth, and real estate supply and demand are in relative check, in part because that growth did not lead development to overshoot the needs of industry and commerce. The cycle is turning, and the successful investment strategies of past may not suit the conditions emerging today.
The much neglected sector has green shoots too. Recent announcements in Union Budget on various tax incentives and a scheme to create 100 smart cities in the country have added to the optimism of Industry towards revival and growth. Efforts to resolve some of the most critical bottlenecks like approval procedures, conditions under FDI policy, time bound approvals, delays due to land acquisition norms etc. are currently on. What is notable is that government is committed towards reforms and is also evolving new platforms of investing and reviving unorthodox sources of capital for Real Estate Industry. These include new instruments of financing like REITs, relaxation of FDI and AIF norms, and introduction of Limited Liability Partnerships, which shall help the industry to gain access to long and sustainable capital and survive the catch 22.
In the backdrop, while there has been increasing allocations among investors such as pension, private and sovereign wealth funds to core real estate as they search for yield to meet their liability return targets. Many seasoned investors now recognise that real estate allocations along the order of 5% or more can move the needle when it comes to their overall return numbers. In addition to investments made by the traditional investor base, new sources of capital are emerging, as institutions that have not previously invested in the asset class, warm up to the opportunity. Over the medium term, there is also the prospect of funds tapping retail investors, and further out still, there are pools of capital that are starting to accumulate in emerging markets as a swelling middle class starts saving and buying insurance products. Surely and shortly we would see emergence of REITS, CMBS (Commercial Mortgage Backed Securities), Equity and Mezzanine Financing also for Commercial Real Estate; fully amortising- fixed rate- non-recourse loans as game changer! And the perception shall change too!
About the author
Somendra Sarwal, Associate Director, Capital Markets and Investment Services at Colliers India is an Investment Banking professional with a cumulative experience of over 14 years in Structured Finance, Corporate & Investment Banking, Private Equity & Debt Syndication, Para Legal & Fiduciary Business etc. Has 360o exposure of the entire investment eco-system.