Reforms such as RERA, REITs and easier FDI norms main draw: Experts

MUMBAI: Foreign institutional investors have raised their game in the Indian real estate market and the offshore investor base is on the rise as a new set of investors, including pension funds and sovereign wealth funds from countries such as Canada, Netherlands, Qatar and Singapore, are increasing their stake in Indian real estate.

The total annual investments into Indian real estate from foreign investors have consistently outpaced their domestic counterparts, and in the past couple of years, the gap has widened further. Since 2016, foreign investors have invested close to $9 billion, against $2.1 billion by Indians.

Among foreign investors, participation from a few countries such as Canada, Hong Kong, the Netherlands and Qatar have gained prominence over traditional investors like Singapore and the United States. Overall, these countries have gained around 24% additional market share.“The strength of the Indian economy and favourable demographics, coupled with the introduction of several growth-oriented reforms including Real Estate (Regulation and Development) Act, 2016; Real Estate Investment Trusts; Goods and Services Tax; relaxation of Foreign Direct Investment (FDI) norms, etc., are aiding the real estate sector to attract higher investments,“ said Neeraj Bansal, Partner and Head, ASEAN Corridor, Building, Construction and Real Estate, KPMG in India.

The investment since 2016 by foreign funds has mostly been in commercial assets such as office space, warehouse and retail. However, investors from Hong Kong as well as Indian domestic institutions have largely allocated capital towards residential projects. “While PE funds continue to be bullish about India, there's a growing interest from foreign pension funds and sovereign wealth funds, which have more than doubled their investments in year-to-date 2017, accounting for nearly 60% share ($3 billion) of total investments as of date,“ said Bansal. Since last year, pension funds have invested more than $1.7 billion in Indi an real estate sector and have emerged as the second largest investor after private equity players. On the other hand, sovereign wealth funds, which were investing around $700-800 million on an annual basis in India since 2014, have deployed about $1.7 billion this year.

While pension funds have been primarily interested in taking up warehousing, retail and to some extent office assets, SWF have mostly invested in office space, and to some extent, residential. Both categories prefer investing mostly in Metro and Tier 1 cities. In 2016, private equity players and non-banking finance companies have together extended credit of $4.6 billion to developers against $1.2 billion extended by banks.

While the lending by banks for the recent period is not available, a status check with developers has suggested that PEs and NBFCs are the most preferred lenders, said KPMG India. This trend may witness a change in the long term with improvement in transparency driven by the real estate regulatory law. With improved transparency and governance in the sector, the funding from banks may enhance on the back of reduced risk.