PE Investments: Non-Metros Seen Stealing Big Cities' Thunder

Metropolitan cities in India have always been the favorite for the private equity (PE) investment funds. However, there is a paradigm change witnessed in the past few years. The 'hot money' is no longer concentrated to few cities.

The PE funds are fast turning towards non-metro cities and sub-urban areas. Since 2016, more than 40 per cent PE capital has gone into non-metro cities such as Pune, Ahmedabad, Chandigarh, Mohali and Amritsar, coupled with sub-urban hotspots like Greater Noida, Sohna, Thane and Chengalpattu, industry reports show. 

During 2016, PE funds pumped in approximately $5.8 billion in India's real estate sector. Of the total, around $2.4 billion was invested in metro suburbs and non-metro real estate markets. If we further break down these numbers, non-metro cities received PE funds to the tune of $1.6 billion.

Source: KPMG, Capital Analytics

It is not that the PE funds started investing in non-metro markets all of a sudden. It has been observed that this trend actually picked pace in 2015. During that year, non-metro real estate markets received $1.6 billion – that was around 35 per cent of the total PE investments infused into the sector. So, we can comfortably say that 2015 was actually the inflection point in this direction.

Another major trend that comes to the fore out of this entire story is that the pattern of PE investments in non-metro real estate markets is radically different from the metro cities.

Also read: Why Is Private Equity Investment Rising In Real Estate?

Let's take an instance of year 2016.

During this year, PE funds invested 60 per cent of their capital in the office real estate segment. However, when it came to non-metro cities the investments in this segment is limited to 22 per cent of the total.

Source: KPMG, Capital Analytics

It is right to assume the reason. Non-metro cities have a limited base for the corporate sector and it is natural for the PE funds to observe this fact. Now the next question is: which segment in non-metro markets is garnering maximum interest from the PE funds? Perhaps most of us will think about the residential real estate segment. Right?

Surprisingly that's not true. It is the retail real estate (33 per cent) segment in non-metro cities that has secured the largest chunk of investments from PE funds since 2016. That's yet another indicator of how well India's consumption story has been perceived by global investor community. Warehousing is yet another segment that is enjoying substantial attention from the PE funds pouring funds into the non-metro property markets in India. The residential real estate segment contributes a meager 11 per cent to the total PE fund investments in the non-metro markets.

Also read: Year's Biggest Private Equity Investment Deals in Real Estate