Private equity investments dry up in retail real estate

Private equity investments in the retail segment of real estate declined during the January-September period on a year-on-year basis with investors remaining cautious due to the pandemic.

Knight Frank India’s report on PE investments in domestic real estate sector shows that PE players abandoned retail in favour of office assets as they fear the virus is likely to keep footfalls low even though malls have opened in several cities.

During the period, PE investments in real estate touched $2.3 billion with office space cornering 81% share, followed by warehousing at 10%, residential 9% and retail with zero investments. Overall investments fell 57% Y-o-Y from $5.3 billion in January-September 2019, it said.

Knight Frank India chairman & MD Shishir Baijal said PE investors took advantage of the economic slowdown to scout for grade-A assets with strong growth trends for investments. Hence assets in office segment saw positive investment activities. The average deal size too was seen to be remarkably higher in YTD 2020 (Jan-Sept) compared to full year 2019.

On reasons behind retail failing to attract any investment this year, the real estate consultancy said the pandemic-induced lockdown forced malls to halt operations thereby impacting businesses. Investors fear Covid is likely to keep footfalls low even after reopening of malls.

“Further, to give some relief to tenants, several mall owners in India had announced a partial/full rent waiver for lockdown period despite having to take a significant financial hit. This partial waiver has been extended for the rest of financial year in some cases, as mall owners waived-off a portion of minimum guarantee (or fixed portion) of rent and opted for a higher percentage of revenue shares to avoid vacancy in their asset. Such high levels of uncertainty have kept investors away from retail assets,” Knight Frank India added.

Office assets seems to be the darling of investors. Since 2011, it has garnered $15.4 billion of equity investments. During the YTD 2020, the segment garnered $1.87 billion from four deals. Out of this, around $1.64 billion alone was part of a large office deal. Investments in office segment fell 31% Y-o-Y compared to $2.7 billion in the year-ago period. In last 10 years, Mumbai took the largest quantum of office investment worth $5.01 billion followed by Delhi NCR with $2.8 billion and Hyderabad with $2.01 billion.

Knight Frank also assessed the real estate assets owned by PSUs and estimates that top 45 companies hold commercial properties viable for Real Estate Investment Trust (REIT) at a potential of over a whopping Rs 1.2 lakh crore. The report highlights that quantum of REIT potential can be significantly higher than Rs 1.2 lakh crore if office buildings of the 45 PSUs are valued on market value basis and also with the addition of office assets of other listed PSUs along with the office assets of the unlisted PSUs which are under the direct ownership of the central government.

“The PSUs have raised funds at higher rates through bonds/NCDs over the past two years compared to the possible yield which can be offered by GOI PSU REIT and the yields offered by the two listed REITs trading currently,” it added.