Why Is Private Equity Investment Rising In Real Estate?

For over two years, the real estate prices in Indian cities have been stagnant, with private equity (PE) investment being an exception. According to a study by commercial real estate company Cushman and Wakefield, private equity investment in India's real estate was up by 72 per cent in 2015. This is the highest since 2008. Of the Rs 25,683 crore invested by private equity investors in Indian real estate, Rs 18,000 crore was in the residential segment.

What could be the reasons behind rising PE investments in the real estate sector in general and housing in particular?

• PE investors have a strong preference for real estate assets in core commercial projects of well-known developers, who deliver their projects in time. This suggests that even though PE investors are buying real estate assets more, they are carefully choosing where to invest. They are investing, largely, in the best Indian cities. 

• The Reserve Bank of India (RBI) reduced the repo rate (the rate at which the central bank lends money to commercial banks) by 125 basis points in 2015. A fall in inflation may encourage the RBI to cut repo rate further, leading to home loan interest rates falling. This is likely to raise demand for housing. 

• When the Seventh Pay Commission proposals are implemented, the salaries of government employees are likely to rise. PE investors have anticipated that the residential demand would be greater in 2016 and 2017.

• The demand for residential units is still high in fully constructed projects. Much of the unsold inventory in large Indian cities is in under-construction projects. So, private equity investors think that investing in projects when developed are in need of money is a good investment opportunity. 

• PE investors are interested in markets throughout the world. India is one of the fastest growing economies. As major policy proposals and infrastructure projects are under way in many large Indian cities, the economy is likely to improve in the next few years, driving up greater demand for real estate.