Private equity investments in real estate have experienced a decline over the past five years, despite a residential boom and recovery in the commercial office segment.
While the number of deals has remained constant, the average deal size has decreased. According to the Anarock Group, the value of private equity deals in real estate dropped from $5.1 billion in FY 20 to $3.7 billion in FY 24.
This decrease is primarily attributed to reduced activity by foreign institutional investors, who typically contribute a significant portion of the investment volume, owing to global economic uncertainty and geopolitical instability. India's real estate market has traditionally been an attractive destination for global investors, particularly from the US.
However, due to inflationary pressures in the US economy, investors have adopted a more cautious approach, resulting in slower decision-making processes.
Trends in Deal Sizes
Over the period from FY 20 to FY 24, there has been a notable 30% reduction in the average deal size.
This decline is primarily attributed to significant transactions typically observed in the commercial office space through acquisitions, primarily driven by foreign investors.
While the office sector continues to garner the largest share of capital due to its promising returns, followed by the residential sector, the number of substantial office acquisitions has dwindled as many investors adopt a cautious "wait and see" approach.
Notable Deals in FY24
One standout deal in FY24 was the joint acquisition by Brookfield India REIT and Singapore's GIC of two commercial office properties in Gurgaon and Mumbai, totaling $1.4 billion.
The commercial office segment took center stage in PE transactions during FY24, commanding a 57% share of the total transaction value.
Is domestic activity on the rise?
In FY24, domestic investors exhibited heightened activity, with their share increasing to 29%, up from a mere 8% in FY20, even as foreign investment declined.
This surge contributed to a consistent deal flow, as domestic investors offer a blend of equity and debt financing. A revival in the residential sector and enhanced credit profiles of developers, stemming from improved cash flow visibility, have further incentivized domestic investment.
Investment Growth in the Coming Year
Anticipation is high for an upswing in investments during FY25, fueled by the robust standing of the real estate sector supported by economic expansion.
Confidence among investors is set to strengthen, with momentum in deals gaining traction, particularly in the latter half of FY25, coinciding with the formation of a new government. Promised policy stability and continuity are anticipated to further bolster investor sentiment.
As interest rates in the US begin to decline, there's optimism for increased investment across various sectors, including real estate.
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