Two fold growth in PE investments

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1 INR, Billion INVESTMENT MARKETBEAT Two fold growth in PE investments INDIA Contents Foreign Direct Investment 1 Private Equity Investments in real estate 2 Investment Volume 2 Investment Type 2 City and Asset Wise Investment 3 Corporate Transactions in real estate 4 FOREIGN DIRECT INVESTMENT (FDI) INFLOWS The first quarter (January-March) of India witnessed quarterly FDI inflows of INR 7 bn (USD.6 bn), the second highest quarterly FDI received in last three years. On cumulative basis, the services sector and the trading sector attracted the largest share of the FDI inflows during the quarter, accounting for 25% and 11% respectively. However, FDI inflows in the construction development sector continued to decline with the first quarter of recording INR.5 bn (USD 8 mn) compared to INR 1.6 bn (USD 24. mn) noted in the previous quarter, about 66% lower. This is the lowest quarterly FDI inflow that the sector has witnessed since (Figure 1).The overall share of the construction development sector in total FDI inflows during FY - declined to.3% from 2.5% in the previous year. There has been a tremendous inflow of FDI in real estate and also committed funds, post relaxation of norms in the purchase of built assets, especially in retail space. Another big infusion is now set to take place in the next few months through the sale of sizeable stakes in their office portfolios by a number of prominent Indian developers. Implementation of Real Estate Regulatory Authority (RERA) and other ground level reforms to institutionalise the construction sector will further boost investor confidence to invest in real estate. The relaxation in FDI norms in other sectors such as food processing, defence and pharmaceuticals made during the quarter will help drive overall business investments in the next 1-2 years, which in turn will boost demand in the real estate sector, specifically in the industrial, logistics and warehousing assets. These are good progressive FDI policies that the government has announced. Now, the government needs to diligently implement the announced policies in infrastructure development, land digitization, RERA implementation, title insurance, Goods and Services Tax (GST), etc. Figure 1 INVESTMENT VOLUME Contact Siddhart Goel Senior Director, Research Services, India siddhart.goel@ap.cushwake.com 4 3 FDI in Construction Development (INR bn) Number of announced PERE deals (RHS) Announced PE Deals (INR bn) 5 - Source: DIPP, Cushman & Wakefield Research cushmanwakefield.com INVESTMENT MARKETBEAT 1

2 India Private Equity Investment in Real Estate (PERE) Investment Volume Significant increase in quarterly investment PERE was noted at INR 72 billion (USD 1.1 billion) during the second quarter (April - June) of. The total investments increased by 87% over the previous quarter and by over % over the corresponding quarter of the previous year. This growth in investment activity can largely be attributed to significant increase of investments in residential asset class, during the quarter. The total number of deals closed during the quarter also increased by 65% to 28 as against 17 noted in the previous quarter. The average deal size rose % to INR 2.6 billion compared to INR 2.3 bn (USD 34. mn) recorded in the preceding quarter. Domestic funds were more active than foreign funds during the quarter and accounted for 66%, INR bn (USD 78 mn), of the share of total investments and 75% (21) in terms of number of deals closed (Figure 2). Among foreign funds, US based funds were the most active and accounted for about 86%, INR 21 bn (USD 3 mn), of the share of foreign investments. The remaining % of investments were made by Europe based funds (Figure 3). The structured debt strategy remains the key driver of investments in residential space as it allows investors to make project level investments that are senior secured and offer guaranteed returns at pre-agreed terms, primarily in the residential asset class. About 74%, INR 53 bn (USD 789 mn), of investments made during the quarter were via this strategy. Investment Type Figure 2 PE Investment Volume - Domestic or Foreign Fund Domestic Foreign Figure 3 PE Investment Volume - Region-wise Asia-Pacific* India North America Europe Middle East SPV level deals remain buoyant The Special Purpose Vehicle (SPV) route for investments continued to be the most preferred by funds. SPV levels investments are considered to be safer than entity levels investments as the investments are secured, underwritten at asset level, easy to monitor and control and easier to exit. Figure 4 Nature of PE Investment Entity SPV The second quarter recorded about 95% of deals, INR 68.4 bn (USD 1 bn) being made via the SPV route (Figure 4). Over 95% of investments made by domestic investors were made via the SPV route. A similar trend was noted for investments made by foreign funds during the quarter cushmanwakefield.com INVESTMENT MARKET UPDATE 2

3 No of Deals India City-wise and Asset-wise announced PERE Mumbai maintained its dominant position in garnering the maximum interest of investors for the fifth consecutive quarter. The city s share in the total PE investment volume stood at 33% (INR 23.4 bn / USD mn) during the quarter (Figure 5) and was closely followed by Delhi-NCR with a 31% share (INR 22.3 bn / USD 332. mn). Bengaluru was placed third with a 24% share (INR 17.3 bn / USD mn) (Figure 6). Residential segment occupied the majority share of 76% in the total PE investments, primarily by domestic investors. These included both entity and project level investments, primarily in the form of structured debt. Investments via structured debt strategy are increasingly being made in the residential asset class which has been facing liquidity challenges and a pile-up of unsold inventory. Investors are favouring investments in the residential asset class as it is relatively easier to exit their investments in comparison to other asset classes, while having assured and secured returns. Investment volume in the residential segment doubled over the previous quarter and stood at INR 54.9 bn (USD mn) (Figure 7). Retail asset class witnessed the second highest share at % of the total investment volume during the quarter. This was largely due to one large deal amounting to INR.5 bn (USD 2.9 mn) for a transit-oriented development project in Navi Mumbai getting finalised. Retail segment surpassed its previous quarter s investment volume, growing 45% q-o-q. Private equity funds are increasingly exploring opportunities in the retail segment as the asset class had been largely underperforming and there are expectations for a revival. Commercial office and hospitality sectors did not witness any investment in, unlike the previous quarter. But this is expected to change over the next few quarters as the industry gears up for REITs and private equity investors are finalising deals in rent-yielding office assets. The coming quarters are likely to witness transactions in the hospitality segment as well with some hotel chains planning to dispose assets to reduce their debt levels. Figure 5 PE Investment Volume City Wise Figure 6 Announced PE deals City-wise (No. of deals) Figure 7 Mumbai Delhi-NCR Bengaluru Pune Chennai Others PE Investment Volume Asset-wise Mumbai Delhi-NCR Bengaluru Pune Chennai Others Mixed Use Residential Office Hospitality Retail cushmanwakefield.com INVESTMENT MARKET UPDATE 3

4 INR billion No. of Deals India Table 1 Significant PERE Deals in INVESTEE / SELLER INVESTOR / ACQUIRER TYPE OF DEAL CITY PRICE (INR BN) M3M Indiabulls Housing Finance Structured Financing NATURE OF DEAL PERIOD Delhi NCR.5 SPV BCC Infrastructures Edelweiss Financial Services Structured Financing Mahaveer Group Xander Finance Structured Financing Lodha Group Piramal Fund Management Structured Financing Delhi NCR 2.9 SPV Bengaluru 1.2 SPV Mumbai 4.3 SPV L&T Seawoods Blackstone Group Purchase - Built Retail Mumbai.5 SPV Corporate Transactions in Real Estate Sector The second quarter of witnessed a 57% decline in corporate transactions over the previous quarter, to INR.4 bn (USD 244 mn) (Figure 8). The decline in transactions can be attributed to the absence of office transactions during the quarter. The total number of deals also declined from 9 in to 5 in ; average deal size was INR 3.8 bn (USD 56.3 mn). Delhi NCR continued to witness the highest share of total corporate transaction volume during the second quarter, accounting for about 25% share at INR 4. bn (USD 6 mn). Development sites remained as the top category for corporate transactions, receiving the whole investment made during the quarter. Mumbai accounted for 21% of the share, followed by Bengaluru and Pune at % and 11% shares respectively (Figure 9). On the back of slow sales in residential segment, select real estate select developers having high debt are trying to liquidate their assets in order to generate funds and reduce their debt. On the other hand, cash-rich developers are taking advantage of this situation and acquiring the land parcels at attractive rates. Among other cities, Hyderabad has been gaining significant buyer interest recently. The stable political environment post bifurcation of the state in has built confidence among investors towards the long term investment potential of the city. Though Hyderabad had recorded corporate transactions amounting to about INR 8.8 bn (USD 4 mn) during, the first two quarters of have already recorded transactions totalling INR.4 bn (USD 5 mn). Figure 8 Corporate Transactions Volume Figure 9 Announced Corporate Transaction City-wise Total Value of Transactions (LHS) Total Number of Transactions (RHS) Mumbai Delhi-NCR Bengaluru Pune Others cushmanwakefield.com INVESTMENT MARKET UPDATE 4

5 Research Siddhart Goel Senior Director Research Services, India siddhart.goel@ap.cushwake.com Capital Markets Diwakar Rana Managing Director, India diwakar.rana@ap.cushwake.com Research Sigrid Zialcita Managing Director Research, Asia Pacific sigrid,zialcita@cushwake.com Capital Markets Gary Hollis Managing Director, Head of Capital Markets Asia Pacific gary.hollis@cushwake.com Disclaimer This report has been produced by Cushman & Wakefield for use by those with an interest in commercial property solely for information purposes. It is not intended to be a complete description of the markets or developments to which it refers. The report uses information obtained from public sources which Cushman & Wakefield believe to be reliable, but we have not verified such information and cannot guarantee that it is accurate and complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained herein and Cushman & Wakefield shall not be liable to any reader of this report or any third party in any way whatsoever. All expressions of opinion are subject to change. The data contained in this report is based upon that collected by Cushman and Wakefield. Our prior written consent is required before this report can be reproduced in whole or in part. Cushman & Wakefield. To see a full list of all our publications please go to cushmanwakefield.com or download the Research App th Floor, Building 8C, DLF Cyber City, Gurgaon, 2 2. India cushmanwakefield.com