Private Equity Funding for India Realty Drops, Says Knight Frank

(Bloomberg) -- Private equity investment into Indian real estate slumped by 93% in the first five months of 2020 and may stay subdued over the year as the coronavirus pandemic and a slowing economy hurt the market, according to Knight Frank LLP.

Only five such deals amounting to $238 million were closed this year, the real estate consultancy firm said in a report Wednesday. The funds’ investments in India’s property market had been sliding from a peak of $8.8 billion in 2018 as the country’s growth slowed.

“The recall of undeployed capital by sponsors, the emergence of attractive opportunities globally, increase in risk premiums, contraction in Indian GDP and Covid-19 related uncertainties would cast its shadow on investor sentiments and we expect the investor activity to be subdued in 2020,” Shishir Baijal, chairman at Knight Frank India, wrote in the report.

Rising wariness among PE funds comes on top of a prolonged cash squeeze in India’s shadow banking sector, a key source of financing for developers. Builders are struggling to roll over debt coming due, raising the risk of a wave of defaults and uncompleted projects.

Knight Frank’s outlook:

• Office Space: The cycle of strong office-rental growth witnessed in India over the last few years is expected to taper down or stagnate on account of lower occupier demand. Investors are in a wait-and-watch mode and are likely to slow down their investments in office assets. The risk premiums associated with these assets will increase due to the pandemic.
• Retail Space: It may not witness much investor activity over the next 12 months as retail would be among the last to recover. Investors are now associating much greater risk with retail assets than office and are accounting for longer periods of no rentals or lower rentals in their financial models.
• Warehousing Space: Greater investor interest would keep capital rates stable at current levels for the warehousing industry in 2020. Funds expect the industry to emerge stronger and recover faster from the pandemic crisis, outperforming other property market segments. The sector will be supported by a significant shift in supply chain management methods and renewed growth in e-commerce.
• Residential Space: The segment will find it further challenging to attract private equity capital. Apartment sales were already slow, and demand from home buyers is expected to dwindle in 2020 due to the fallout of the pandemic.

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