Banks turn wary of lending to real estate, PE firms step in, shows Economic Survey

Banks' share in real estate funding has dropped significantly from 68% in 2013 to 17% in 2016 and private equity (PE) funds and financial institutions have stepped up their investments in this pace to fill the gap.

The share of PE funds and financial institutions like pension funds and sovereign wealth funds in real estate funding has gone up significantly from 14% in 2013 to over 82% in 2016, states Economic Survey 2018 tabled in Parliament on Monday.

On a cumulative basis for the 2013-16 period, PE funds had the highest source of funding accounting for 57% share, followed by banks with 34% share and the balance 9% was funded through foreign direct investment (FDI) inflows.

FDI into construction development sector declined to $107 million in 2016.

“Private equity investments in the real estate sector have increased from $0.9 billion in 2013 to over $5.9 billion in 2016, recording more than sixfold jump during this period. The year 2017 is on its course to witness the highest annual investment in Indian realty in the past decade, with about $5 billion worth of funds already been invested between January and June 2017. Indian real estate has attracted institutional investments (excluding bank credit to commercial real estate) of over $10.7 billion since the beginning of 2016, which is more than half of the total investments witnessed since 2013,” read Economic Survey.

According to the survey, the reasons for dwindling lending from the banks are “rising NPAs, higher risk provisioning assigned to real estate sector and dwindling profits in the real estate sector.”

The fact that the industry is under stress is evident from National Real Estate Development Council’s (Naredco) data, which shows that residential launches across top 14 cities in India during first six months of 2017 plunged by over 56% on year to the lowest in past five years to about 58,000 units. Similarly, new residential sales fell by over 38% to a five-year low of about 101,850 units during this period.

Anuj Puri, chairman, Anarock Property Consultants, told DNA Money, “During the year 2017, PE investments in the residential asset class fell significantly and witnessed a loss of around 25% in the overall share compared to the previous year. Also, for the first time in last three years, it lost its pole position in PE investment share. The steady fall in appreciation and persistent gloom on the residential property market have caused PE investors to shift their focus towards other asset classes.”

A major portion of PE investment in the residential space has been in the form of structured debt, while investments in pure equity form have fallen below 10%. Additionally, the recent investments were largely focused on refinancing existing debts and mostly concentrated on projects in advanced stages of construction.

“This trend is likely to continue in the near future as well, largely due to the upsurge in demand for ready-to-move-in properties which offer better safety for investors,” said Puri.