By Mr. Ramesh Nair, JLL India
In 2013,
the availability of debt capital is likely to increase in real estate projects
whilst the flow of equity capital will remain more or / less stable.
As there
are additional cuts expected in cash reserve ratio (CRR) and repo rates that
will infuse more liquidity into the system, the bid-ask spreads will also
decrease, increasing overall transaction volume in 2013.
Cross-border
flow of capital will begin to make a gradual comeback in the year ahead. Cap
rates for office and retail properties are likely to descend to 10.5 % and 11.5
% from 11 % and 12 %, respectively.
Investors
Focus..!
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, very few development companies will be successful on the public equity
markets.
Nevertheless,
private equity (PE) deals volumes will increase, and there will be more M &
A activity within the PE industry.
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| Mr. Ramesh Nair, JLL India |
A number
of vintage funds who have invested during 2007 – 2008 will have to look at
exiting in 2013, some of them at low internal rate of return (IRR).
Given the
overall uncertainties, these funds may look at postponing their exits to 2014.
Insurance
firms 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 five
years to four years.
In 2013,
after a lull of two years, banks are likely to start offering construction
finance to residential projects with approvals. They will also be slightly more
flexible on interest rates, collaterals, loan-to-value (LTV) and upfront fees.
Established
funds are expected to get back into the fund raising mode after a three-year
hiatus. Developers with longer operating
history such as Oberoi Realty, Sobha Developers and Prestige Estates will continue
to find it easier to raise funds. This is because these developers have managed
to grow effectively over the years and have increased predictability of income.
With the
accent for 2013 remaining firmly on local expansion, it is unlikely that any
major developer will venture out to
expand nationally. 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 investment 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 the last mile funding for residential houses
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 and
closely monitor if the funds raised by the companies are being used for stated
objectives.
New
Domestic Real Estate PE Funds..!
PE funds
will raise distressed real estate funds and get traction from bank
non-performing assets (NPAs) and asset reconstruction companies (ARCs). 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 and operating controls post the global
financial crisis. Limited partners will scrutinise fund platforms a 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 and focus
on investing in income producing office assets, with an accent on asset
repositioning, refinancing and refurbishment.
We expect
new guidelines for Non-Banking Financial Institutions (NBFCs) and Housing
Finance Companies (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 and with SEBI allowing
debt funds to invest an additional 10 % in HFCs. HFCs will also look at tapping
the qualified institutional placement (QIP) market to raise funds in 2013.
What’s New..!
The new
development plan by Ahmedabad Urban Development Authority (AUDA) has proposed
to create a new “affordable housing zone” for the city and has raised the Floor
Space Index (FSI) across different pockets of the city in February 2013.
Green
Wall..!
TERI (The
Energy Research Institute) and OTDC (Odisha Tourism Development Corporation
Ltd) signed a MoU to develop a sustainable tourist circuits & destinations
in Odisha.
Deal of the Month..!
Prestige
Estates and KL Hitec Secure Print has bought about 5.8 acres of land in Hitec
City, Hyderabad in a joint venture. They will develop a luxury residential
project of 12 lakh square feet on the site.
About the
author..
Ramesh
Nair is Managing
Director-West India
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