Indian Real Estate Capital Markets Predictions for 2013

by Mr. Ramesh Nair, MD (West), JLL India

In 2013, the availability of debt capital is likely to increase while the flow of equity capital will remain more or / less stable. The bid-ask spreads will reduce, increasing overall transaction volume even as additional cuts in CRR (Cash Reserve Ratio) and repo rates will infuse more liquidity into the system.

Cross-border capital will begin to make a gradual comeback in the coming year and cap rates for office & retail properties are likely to descend to 10.5 per cent and 11.5 per cent  from 11 per cent  &  12 per cent  respectively.

Focus More On Transparency..!

Mr. Ramesh Nair, JLL India

Investors will focus more on transparency, governance & liquidity before investing. Given the on-going challenges that the Indian real estate sector faces on these fronts, even fewer development companies will be successful on the public equity markets.

Nevertheless, PE (private equity) deals volumes will increase, and there will be more M & A (merger and acquisition)  activity within the PE industry. A number of vintage funds from 2007 -2008 will have to look at exiting in 2013, some of them at low IRR’s. Given the overall uncertainties, these funds would look at postponing their exits to 2014.

Insurance companies will start investing directly in low risk, income producing office real estate. Investment bidders per property will increase, this time around with lower return expectations. Investment periods of funds will reduce from 5 years to 4 years.

Construction Finance..!

In 2013, after a lull of 2 years, banks are likely to start offering construction finance to residential projects with approvals. They will also become marginally more flexible on interest rates, collateral's, LTV’s (Loan to Values) & upfront fees. Established funds will get back into the fund raising mode after a 3 year hiatus.

As before, developers with longer operating history such as Oberoi, Shobha & Prestige who have managed growth effectively over the years & predictability of income will find it easier to raise funds in 2013.

It is unlikely that any major player will venture out nationally, with the accent for 2013 remaining firmly on local expansion. Also, we will see developers focusing more on joint ventures with landlords rather than on buying land.

In 2013, we will see most PE deals being structured to give the investor the first preference to cash flows. Most real estate PE investments will be focused on Tier I cities. Funds with a good track record that have a strategy to target a narrow asset class within specific locations such as last mile funding for residential under construction projects in Tier 1 cities and having strong delivery teams will be able to raise funds more easily.

Regulatory authorities will increase their scrutiny of private fund raising offerings & closely monitor if the funds raised by the companies are being used for stated objectives.

PE funds will raise distressed real estate funds & get traction from bank NPA’s (Non Performing Assets) and ARC’s ( Asset reconstruction companies). A number of new domestic real estate PE funds backed by corporate entities are likely to be launched in 2013. Also, large family offices will now begin creating dedicated real estate teams.

PE fund terms such as waterfall structure, carried interest, general partner commitment and management fees will change to address investor concerns such as governance, transparency, reporting & operating controls post the global financial crisis.

Limited partners will scrutinize fund platforms lot more carefully before investing on the heels of previous negative experiences with issues such as integrity of the general partner and quality and sustainability of earnings.

Many more funds will adopt a conservative cash flow driven investment approach & focus on investing in income producing office assets, with an accent on asset repositioning, refinancing & refurbishment.

New Guidelines..!

We expect new guidelines for non-banking HFCs to assist in pushing funding for the housing sector in 2013. There will be more liquidity available in the housing finance market as rules for raising external commercial borrowings will be relaxed for HFCs (Housing Finance Companies), and with market regulator SEBI allowing debt funds to invest an additional 10 per cent in HFCs. HFCs will also look at tapping the QIP market to raise funds in 2013.

About the author..!

Mr. Ramesh Nair is Managing Director (West)  at Jones Lang LaSalle India (JLL India)

Contact:
Mr. Ramesh Nair
Managing Director - West India
+91 22 6620 7575
ramesh.nair@ap.jll.com

Ramesh Nair JLL India <ramesh.nair@ap.jll.com>

Src: Jones Lang LaSalle India Real Estate Compass

            

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