OPPORTUNITIES FOR FOREIGN INVESTORS IN INDIAN REAL ESTATE. A Cushman & Wakefield Research Publication

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1 OPPORTUNITIES FOR FOREIGN INVESTORS IN INDIAN REAL ESTATE A Cushman & Wakefield Research Publication

2 CONTENTS Executive Summary - 1 Introduction - 2 Overview : Real Estate Sector in India - 3 Key Regulatory Changes - 5 Market Potential and Reason for Foreign Investors to Invest in India - 6 Opportunities - 7

3 EXECUTIVE SUMMARY The foreign direct investments (FDI) norms in India have been relaxed to allow foreign entities to investment in the entire real estate stock of completed or under construction projects. The total private equity investment in India grew by 59% year on year in 2015 whereas investments from foreign based investors increased by 33% in 2015 compared to the previous year. At the end of 2015, the Grade A office market is estimated to have investment potential between USD 54billion to 67 billion that can generate rental income of USD 5.4 billion. The residential market further has potential to invest in over 900,000 under construction units.

4 A Cushman & Wakefield Research Publication INTRODUCTION The Indian economy is forecasted to record GDP growth higher than China, making it the fastest in the world during FY The positive economic outlook, progressive trade and industry policies and government initiatives have attracted significant investments in India during the last couple of years. The total foreign direct investments during FY recorded 23% growth to USD 44 billion, whereas the first half of FY has already witnessed FDI flows of USD 24.4 billion into India. In particular, the commercial real estate segment gained significant momentum in 2015 and is set on the growth path whereas the residential segment witnessed significant rise in Private Equity in Real Estate (PERE) investments owing to high yield structured debt (SD) investment strategies that offers stable and secured returns at pre-decided terms. 2

5 OVERVIEW - REAL ESTATE SECTOR IN INDIA REAL ESTATE PRIVATE EQUITY TRENDS 4500 (Total # of real estate private equity deals) 100 Private Equity Real Estate (PERE): On the back of improving economic conditions, the PERE investments have grown at over 30% compound annual growth rate (CAGR) since The period between 2010 and 2015 received USD 10.8 billion in PERE investment, of which 60% (USD 6.5 billion) of the investments were made during the last two years. The total REAL ESTATE PRIVATE EQUITY TRENDS Type of real estate private equity deal (basis number of deals) Value (USD, million) No. of Deals 0 Source: Real Capital Analytics (RCA), Cushman & Wakefield 35% 30% 28% 71% 66% 59% 65% 70% 72% 29% 34% 41% Structured Debt Others Source: Real Capital Analytics (RCA), Cushman & Wakefield PERE investments made during 2015 alone stood at USD 3.96 billion. The total structured debt investments grew by 111% in terms of value to USD 1.96 billion (49% share) in 2015 as compared to USD 0.9 billion (37% share) recorded in the previous year. While the number of PERE deals grew by about 23% y-o-y, the share of structured debt deals increased to 72% of the total deals during the year. However due to rise in competition from investors and improved economic scenario, coupon rates for structured debt have reduced to an average of 15% - 17%. 3

6 A Cushman & Wakefield Research Publication Within the top eight cities in India, the three major cities i.e. Mumbai, Bengaluru and Delhi NCR account for about 65% of Grade A office stock. The three cities together accounted for over 85% (USD 3.7 billion) of the cumulative structured debt investments made between 2010 and Mumbai continued to receive the highest PE investments and accounted for over 32% of the structured debt investments Structured debt deals in the residential segment witnessed a remarkable growth of over 86% in At the end of 2015, the residential segment accounted for over 82% of the total structured debt investments followed by office at 13%. Leveraging from the benefits of structured debt such as secured and stable returns coupled with relaxation in FDI norms in real estate sector, these investments are likely to increase in non-residential segments over the next few years. The domestic funds¹ in 2015 were significantly more active and doubled their structured debt investments to USD 3.2 billion for the period , up from USD 1.6 billion during However, foreign funds² have also increased their investments by 47% to USD 1.2 billion during the same period, indicating rising investor confidence in the Indian realty market. CITY WISE SHARE OF SD INVESTMENTS MADE 26% 5% 24% Source: Real Capital Analytics (RCA), Cushman & Wakefield 7% 2% 7% 5% 0% USD 2.4 billion 31% ASSET-WISE SHARE OF SD INVESTMENTS MADE 28% 33% Retail Mixed Use 1% 4% 32% Mumbai Bengaluru NCR Pune Chennai Others³ Mumbai, Bengaluru and Delhi- NCR account for 86% of the total SD investments made between 2010 and Office 13% Residential 82% Total investment : USD 4.4 billion Source: Real Capital Analytics (RCA), Cushman & Wakefield The residential remains the most preferred asset class for investments accounting for 82% of the share of SD investments between 2010 and SHARE OF SD INVESTMENTS BASED ON ORIGIN OF INVESTOR Mixed 0.6% Foreign 27% Domestic 73% Total investment : USD 4.4 billion Source: Real Capital Analytics (RCA), Cushman & Wakefield The domestic funds account for 73% of the total SD investments made between 2010 and Domestic funds are classified as entities that are headquartered in India 2 Foreign funds are classified as entities that are headquartered outside of India 3 Others include Hyderabad, Kolkata and Ahmedabad 4

7 KEY REGULATORY CHANGES: REAL ESTATE INVESTMENTS BECOME MORE ATTRACTIVE period of six months of the commencement of business have been removed. The investment will have a lock-in period of three years for each tranche of investment, however investors are permitted to exit at any time upon completion of the project or after development of trunk infrastructure i.e. roads, sewage, drainage, water supply & street lighting. Owing to the stringent government policies, the Foreign Direct Investments (FDI) in the Construction Development: Townships, Housing, Built-Up Infrastructure segment during FY declined 37% to USD 796 million. The period between Apr-15 to Sept-15 has recorded a mere USD 81 million in FDI as compared to USD 568 million recorded during the same period in previous year. Therefore, to regain foreign investors' interests in the Indian Real Estate market, the government relaxed its FDI policies in November The key amendments to the FDI regime are: 100% FDI under the automatic route is permitted in construction led development projects including townships, construction on residential and commercial premises, roads &bridges, resorts, hotels, hospitals, educational institutes, recreational facilities, city and regional level infrastructure. The condition for minimum floor area of 0.22 million sq. ft. in construction development projects and minimum capitalization of USD 5 million to be brought in within the The lock-in-period condition is not applicable on special economic zones, hotels and tourist resorts, hospitals, educational institutions, old age homes and investment by Non-Resident Indians (NRIs). The transfer of stake between non-resident investors is permitted without repatriation of investment. The transfer of stake will not be subject to any lock-in period and will not require government approval. The government also clarified that the FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs)⁴ 4 As mentioned in Consolidated FDI Policy published by Department of Industrial Policy and Promotion, Government of India Source: CII and Wazir Advisors, FIPB, Department of Industrial Policies and Promotion, Cushman and Wakefield Research 5

8 A Cushman & Wakefield Research Publication MARKET POTENTIAL AND REASON FOR FOREIGN INVESTORS TO INVEST IN INDIA INVESTMENTS FROM FOREIGN FUNDS IN INDIAN RE USD (million) The Foreign Direct Investment (FDI) policy enforced conditions with regards to project status, project size, lock-in periods, etc. due to which the eligible stock of real estate projects for foreign investors was limited predominantly to large projects with development size of over 0.54 million sq. ft. The Modi led BJP government however made subsequent relaxation in FDI policy for real estate investments in 2014 and The new relaxed guidelines made the entire real estate stock, completed or under construction, eligible for foreign investments. At the end of 2015, the market potential includes completed Grade A office stock estimated between USD 54 billion to 67billion potentially able to generate USD 5.4 billion of rental income. On the residential side, the market potential includes 900,000 units that are scheduled for completion in the coming 4 years. The overall PE investment from foreign funds have almost regained the 2008 investments volumes. As of December 2015, about 34% of the total FDI in India were routed via Mauritius, due to bilateral tax avoidance treaty with India Sum of USD (million) Source: Cushman & Wakefield Research COUNTRIES WISE SHARE OF INVESTMENTS IN INDIA 40% 35% 30% 25% 20% 15% 10% 5% 0% Mauritius Singapore UK Japan USA Netherlands Others Dec/14 Dec/15 Source: Cushman & Wakefield Research 6

9 OPPORTUNITIES As stated in our February 2015 ANREV red paper, high yield debt has become a commoditized but stable product. It is an attractive investment strategy for investors as the deal is structured in a manner that provides assured returns along with a possible up-side. The investments are fully secured assured and offer assured returns to its investors. Though the pricing levels for borrowing in the commercial space have moderated to about 15%-17% at the end of 2015, it still remains as one of the preferred investment strategies of investors. The banks in India have stringent norms that are governed by the Reserve Bank of India which restrict them in terms of flexibility of payment terms, tenure, project status, etc. therefore real estate developers prefer to sign-up deals with PE investors that can structure a deal on case by case basis. With relaxed FDI guidelines, real estate focused government initiatives and growing market, the Indian real estate holds a vast opportunity for investors seeking to invest in Indian real estate. Definitions & Notes Net Absorption: Incremental new space take-up of commercial office RBI: Reserve Bank of India NRI: Non-resident Indian FDI: Foreign Direct Investments Value added office space: Premium buildings that are currently partially vacant but have the potential to get fully leased over the next few months. 7

10 A Cushman & Wakefield Research Publication Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. The firm's 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit or on Twitter. Cushman & Wakefield established operations in India in 1997 and was the first international real estate service provider to be granted permission by the Government of India to operate as a wholly owned subsidiary. We are a strong team of over 2,800 employees, operating across New Delhi, Gurgaon, Mumbai, Pune, Bengaluru, Chennai, Hyderabad, Kolkata and Ahmedabad. In addition, we service over 200 other cities such as Ahmedabad, Nagpur, Cochin, Mysore, Mohali, Chandigarh, Goa, Ludhiana, Jaipur and Coimbatore amongst others. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at For more information about Cushman & Wakefield India, Contact: SANJAY DUTT Managing Director - India Cushman & Wakefield sanjay.dutt@ap.cushwake.com SITARA ACHREJA Director - Marketing & Communication Cushman & Wakefield sitara.achreja@ap.cushwake.com For more information about Cushman & Wakefield Research, contact: SOMY THOMAS Managing Director - Valuation & Advisory Cushman & Wakefield somy.thomas@ap.cushwake.com For more information about Cushman & Wakefield Capital Markets Services, contact: DIWAKAR RANA Managing Director diwakar.rana@ap.cushwake.com Authors of the reports: Rohit Kumar Associate Director - Research rohit.kumar@cushwake.com Pritesh Swamy Senior Manager- Research pritesh.swamy@cushwake.com

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