Private equity investments in real estate plunge as COVID-19 pandemic hits hard

The retail sector has yet to see any big deal taking place this year


The COVID-19 outbreak and the lockdown that was enforced to curb its spread has had a huge impact across sectors. Real estate is one such industry which has been impacted badly. The residential real estate sector, already hit by demonetisation more than three years ago, had only just begun to recover when the pandemic hit.

With the world headed for a recession this year, buyers are likely to postpone discretionary purchases and investors too seem to be preserving their cash for now. 

According to real estate consultants Knight Frank, private equity (PE) investments in the sector have plunged 93 per cent this year till May 31. Between, January-May 2020, private equity investors have pumped in just $238 million in India’s real estate market, compared with $3.38 billion, in the same period a year ago.

“We are operating in uncertain times. Having enforced one of the most stringent lockdown measures globally, 2020 would be a challenging year for Indian businesses,” said Shishir Baijal, chairman and managing director of Knight Frank India.

Residential and retail seem to be among the most affected segments. Compared with 11 PE deals in the housing sector between January-May 2019, so far this year there has been only one deal. The segment has attracted only $40 million worth PE investments till May 31, 2020, compared with $469 million in the same period last year, down 91 per cent.

The retail sector, which had seen three deals worth $397 million in the first five months of 2019, has had no deal this year.

Warehousing and office have also seen 96 per cent and 86 per cent drop in equity investments this year, the consultancy pointed out.

“The recall of undeployed capital by sponsors, emergence of attractive opportunities globally, increase in risk premiums, contraction in Indian GDP and COVID-19 related uncertainties would cast its shadow on investor sentiments and we expect the investor activity to be subdued in 2020,” said Baijal.

Even as the centre, as well as state governments, have begun lifting the lockdown across the country, people, worried about their income and employment, are likely to tread cautiously and discretionary spends like buying a house may not be on the agenda right away.

“In the short term, at least for the year 2020, demand shall remain muted with many potential buyers postponing their home-purchase decisions,” Sharad Mittal, CEO and head of Motilal Oswal Real Estate Funds told THE WEEK.

However, with interest rates at their lowest since 2004, and capital markets likely to see bouts of volatility in the backdrop of COVID-19, demand will return to real estate in the long-term, he feels.

“We may see the return of old-school investing wherein investors plough back their funds and invest them into neighbourhood real estate for a combination of yield and growth,” he said.

Compared with housing, commercial real estate sector has witnessed a boom in the last few years, with a record 45 million square feet of space being leased in 2019. Due to this, commercial realty also attracted 80 per cent of the total external funding in the industry.

A large part of the strong leasing demand was driven by IT and ITes companies, with more than 75 per cent from the US or India. So, the overall impact COVID-19 has on both India and US economies will weigh on this trend.

With many companies adopting work from home strategies and social distancing likely to stay for some time even after the lockdown is lifted, developers will have to revisit their plans from a design perspective, while occupiers will also review office space expansion plans.

“There will be a dip in all-new activity during this year and focus will be more on completing existing projects and ensuring leasing where there are no pre-lease commitments. As a result, there will be a dip in investment flows too,” pointed Mittal.