Will India Housing Sector Return to Favour with PE Firms?

Anuj Puri,
Chairman,
ANAROCK Property Consultants.

Inarguably, the Indian real estate vertical that in the direst need of funding is the residential sector. In a perfect world, the private equity that is now pouring into the country's realty sector would focus on where it is needed the most. However, PE firms have their own investment rationale, and Indian residential real estate has been far from attractive to them.

There are sound reasons for this. The Indian residential sector has been hounded by multiple problems for the last 3-4 years. These include the issue of stalled/delayed projects, liquidity crunch, and high property values despite weakened demand and slow sales.

The country's housing market has also seen the highest impact of policy-induced disruptions. Given the fact that the housing market was tainted by malpractices and lack of customer-centricity by developers, the Government had to step in with policy interventions squarely aimed at cleaning up the sector.

The inevitable fallout of demonetization (DeMo) on an industry which was 'thriving' on black money aside:

The long-pending enactment of the Real Estate Regulation Act (RERA) drew clear regulatory lines for the housing market - for the very first time in India. Unregulated developers had to fall in line, step out of the game or merge with more organized players.

The rebooted Benami Transactions Act closed another gaping loophole, making unregistered property purchase and ownership impossible.

The application of the unified General Service Tax (GST) to replace all other previous taxes related to residential property purchase added another layer of regulation, resulting in increased complexity as well as increased cost of acquisition for most unfinished projects.

While all these measures were arguably essential for the long-term viability of the Indian housing sector, they resulted in a lot of uncertainty. Private equity players are highly averse to uncertainty, so it is not surprising that the residential space has fallen out of favour with them.

As per ANAROCK data, between 2015 and 2018, the share of private equity investments in the residential sector reduced from 47% to a mere 3%. Concurrently, commercial real estate saw a significant rise in PE investments.

In short, private equity investors have been steadily drifting away from the residential sector and are increasingly focused on the country's commercial office segment. Indian office spaces - particularly Grade A projects in CBD and SBD areas - have gained significant momentum over the last four years. Also, the Indian commercial real estate segment has historically been far more transparent and predictable than the residential sector.

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