Real estate sector witnesses a whopping 93% decline in PE investments in 5 months

The private equity investments, which peaked at $8.8 billion in 2018, have witnessed a sharp 23 per cent year-on-year decline to $6.8 billion in 2019 on account of lower interest in residential and office markets. During the first five months of the current year ended May 2020, the PE investments have seen a drastic 93 per cent reduction at just $238 million compared to $3.3 billion in the same period a year ago, according to data released by global property consultant Knight Frank.

The numbers are strictly not comparable during the five month period as the last two and a half months have seen lockdown of the economy, Rajani Sinha, Chief Economist, Knight Frank India said. "While the residential sector has been passing through tumultuous times, dearth of mature assets has led to a decline in investments in the office market," she said in a presentation on Wednesday.

So far, in 2020, the investor activity dropped sharply with only five deals getting concluded, adding up to a meagre $238 million and dropping by 93 per cent year on year. The drop can be attributed to both the COVID-19 pandemic which impacted investor sentiments as well as the slowdown of the Indian economy in 2019. The year has also seen 80 per cent drop in the number of deals concluded in the first five months when compared to the same period last year.

Due to low investor appetite to undertake development risk, the share of residential in the overall investment pie has consistently shrunk, from 60 per cent in 2011 to 57 per cent in 2015 to 11 per cent in 2019. Office, Retail and Warehousing have witnessed significant growth in investor interest and activity in the same period.

"The decline in PE investments in real estate was visible in 2019 when it fell by 23 per cent YoY to $6.8 billion. We are operating in uncertain times. Having enforced one of the most stringent lockdown measures globally, 2020 would be a challenging year for Indian businesses. The recall of undeployed capital by sponsors, emergence of attractive opportunities globally, increase in risk premiums, contraction in Indian GDP and COVID-19 related uncertainties would cast its shadow on investments and we expect investor activity to be subdued in 2020," Shishir Baijal, Chairman and Managing Director, Knight Frank India said.

During the first five months of the year between January and May, around 2.9 million sq feet of office space was transacted.

Sharp slowdown in the domestic economy and specifically the real estate sector will keep the investors cautious. Moreover, with international funds reorienting themselves to attractive opportunities in the developed economies, on account of drop in valuations due to recession, would cast its shadow on the PE investments in Indian real estate in 2020, Baijal added.

In 2020, there has been only 1 private equity investment in the residential sector worth $40 million. The beleaguered residential sector has been in turmoil for several years now and COVID-19 would act as another nail in the coffin. Residential sales were already slow and the demand from homebuyers is expected to dwindle in 2020. On the supply side, the segment is already witnessing consolidation. Overall, the recovery in this segment will get further delayed and the residential sector will find it further challenging to attract private equity capital, Knight Frank report said.