PE investments in real estate decline 17% in 2022 due to inflation, rising interest rates – Knight Frank India

• Private equity investments in India’s real estate sector witnessed a 17% decline in 2022 to $5.1 billion.
  
• The overall number of PE investment deals also came down significantly to 29 in 2022 from 52 last year.
  
• Office and warehousing sectors emerged as PE favourites, accounting for 82% of the total investments this year.
  

Private equity (PE) investments in India’s real estate sector registered a 17.2% decline in 2022, hurt by the troika of elevated inflation, rising interest rates and geopolitical tensions. Overall, PE firms invested $5.1 billion in the country’s real estate sector in 2022, down from $6.2 billion in 2021.

According to a report by Knight Frank India, the office, residential and retail sectors contributed most to this decline – PE investments in these three sectors fell between 19-63% from last year.

“The investment climate in India moderated in 2022 as investors grew more cautious in response to escalating international tensions and concerns about rising inflation and interest rates,” said Shishir Baijal, chairman and managing director, Knight Frank India.

Warehousing: A standout

The warehousing sector, however, was the only sector that saw a growth in PE investments over last year – $1.9 billion in 2022 compared with $1.3 billion in 2021.

The demand for warehouses was due to a strong demand from manufacturing, e-commerce and logistics companies, the Knight Frank India report said, adding that the need for modern warehouses and a dearth of organised assets in this sector led to several greenfield investments.

Despite the growing appeal of warehousing, the office sector managed to draw the largest share of PE investments – accounting for 45% of the total investments. Warehousing came in second with a share of 37%, according to the Knight Frank India report.

The office sector saw most of its $2.3 billion PE investments diverted to Mumbai and Bengaluru in 2022, the report said.

Fewer, but bigger deals

According to the report, PE firms entered into 29 real estate deals this year, down 44% from the 52 deals entered into last year.

While the overall number of deals, and the total investments are down in 2022, the average deal size has registered an increase of 49% to $177 million, from $119 million last year.

Overall, PE firm exits declined 41% in 2022 to $822 million, from $1.39 billion a year ago – an indication that investors may be looking for longer-term gains.

Investments to improve next year

The investment climate is expected to improve in 2023 thanks to moderating inflation, and as a result, slower rate hikes. For instance, India’s retail inflation saw a 5.88% rise in November – the lowest in the past 11 months and within the Reserve Bank of India’s comfort band.

“Looking forward to 2023, we anticipate that inflation for most of the nations and the pace of rate hikes will moderate. With investors paying attention to the economy, governmental and regulatory framework, business results, and valuations, investments in India are expected to improve,” Baijal added.

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