Real estate hit its highs in 2023 but slipping PE investments a worry

• Domestic AIFs saw tepid activity as residential real estate debt witnessed lower demand.
• Large deals dominated the PE investment in real estate in the first nine months of FY24.
• Commercial real estate continued to attract large fund flows, and PE investors favour equity vs debt.
  

A sharp rise in home sales as well rising office occupancies might be the talk of the town. Yet, private equity investments in the sector remained muted. In the first nine months of FY24, i.e. April to December 2023, PE investments in the sector registered a 26% decline, says a report by Anarock.

Investor activity remained tepid due to geopolitical uncertainties as well as a high interest rate environment. The size of domestic investments however declined to 14% of total capital flows to $360 million as compared to $717 million in the same period last year.

"Domestic alternate investment funds (AIFs) have seen lower activity levels as their favoured asset class — residential real estate debt – witnessed lower demand for high-cost funds. Strong residential pre-sales and an accommodative stance by state-owned banks have led to reduced demand for capital from the more expensive AIFs," said Shobhit Agarwal, MD & CEO of Anarock Capital.

The average ticket size marginally increased to $95 million from $91 million in the same time last year. This is largely due to a mega $1.4 billion deal in which Brookfield India Real Estate Trust REIT and Singapore’s GIC together acquired two commercial assets in Mumbai and Gurugram.

The deal also aided the sharp rise in multi-city transactions. Otherwise, Mumbai Metropolitan Region led the transaction league tables in city-specific transactions. The region saw investments flows to the tune of $694 million.

Top 5 real estate PE deals in 9MFY24

Investor	Recipient	Asset class	Deal size
Brookfield RE Trust REIT & GIC	Brookfield AMC	Commercial	$1.4 bn
CPP Investments	RMZ Corp	Commercial	$325 mn
Morgan Stanley	Prakhhyat Group	Warehousing	$85 mn
Blackstone	Allcargo	Warehousing	$76 mn
Kotak Data Center Fund	Sify Infinit Spaces	Data Center	$73 mn

Source: Anarock

Office spaces dominate

Most of the PE investment flows for the fiscal year flew into office spaces which dominated the big ticket deals. Data centers also became an emerging new asset class for investors. Domestic debt funds also showed interest in commercial projects. Varde Partners had invested $91 million in a Hyderabad based project by Phoenix Group.

“The sector’s reliance on IT/ITeS diminished, with manufacturing, BFSI, and co-working spaces contributing to resilient demand. Anticipated growth in the IT/ITES sector is expected as more employees shift to working from offices for 3-4 days weekly,” said Anarock.

Residential real estate was also one of the key sectors which saw large deals in 9M FY24. HDFC Capital as well as PAG invested over $60 million in CCI Projects and Kalpataru Group respectively.

In times when overall flows softened, large deals dominated the scene. Top ten deals accounted for 87% of the total value of PE investments. In the same period last year, they accounted for 76%. While debt capital also flowed in, equity investments are preferred route for PE investors, which is visibly healthy at 84% of total deals.