Real Estate Capital Markets: Predictions for 2013..!

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.

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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