In 2013, the availability of debt capital is likely to increase while the flow of equity capital will remain more or less stable. The bidask spreads will reduce, increasing overall transaction volume even as additional cuts in CRR and repo rates will infuse more liquidity into the system. Cross-border capital will begin to make a gradual comeback in the coming year and cap rates for office and retail properties are likely to descend to 10.5 percent and 11.5 percent from 11 percent and 12 percent respectively.
Investors will focus more on transparency, governance and liquidity before investing. Given the on-going challenges that the Indian real estate sector faces on these fronts, even fewer development companies will be successful on the public equity markets. Nevertheless, private equity deals volumes will increase, and there will be more M&A activity within the PE industry. A number of vintage funds from 2007-2008 will have to look at exiting in 2013, some of them at low IRR’s. Given the overall uncertainties, these funds would look at postponing their exits to 2014.
Insurance firms will start investing directly in low-risk, income producing office real estate. Investment bidders per property will increase, this time around with lower return expectations. Investment periods of funds will reduce from five years to four years. In 2013, after a lull of two years, banks are likely to start offering construction finance to residential projects with approvals. They will also become marginally more flexible on interest rates, collaterals, LTV’s and upfront fees. Established funds will get back into the fund raising mode after a three-year hiatus.
As before, developers with longer operating history such as Oberoi, Shobha and Prestige who have managed growth effectively over the years and predictability of income will find it easier to raise funds in 2013. It is unlikely that any major player will venture out nationally, with the accent for 2013 remaining firmly on local expansion. Also, we will see developers focusing more on joint ventures with landlords rather than on buying land.
In 2013, we will see most PE deals being structured to give the investor the first preference to cash flows. Most real estate PE investments will be focused on Tier I cities. Funds with a good track record that have a strategy to target a narrow asset class within specific locations such as last mile funding for residential under construction projects in Tier 1 cities and having strong delivery teams will be able to raise funds more easily. Regulatory authorities will increase their scrutiny of private fund raising offerings and closely monitor if the funds raised by the companies are being used for stated objectives.
Private Equity funds will raise distressed real estate funds and get traction from bank NPA’s and ARC’s. A number of new domestic real estate PE funds backed by corporate entities are likely to be launched in 2013. Also, large family offices will now begin creating dedicated real estate teams. PE fund terms such as waterfall structure, carried interest, general partner commitment and management fees will change to address investor concerns such as governance, transparency, reporting and operating controls post the global financial crisis.
Limited partners will scrutinize fund platforms lot more carefully before investing on the heels of previous negative experiences with issues such as integrity of the general partner and quality and sustainability of earnings. Many more funds will adopt a conservative cash flow-driven investment approach and focus on investing in income producing office assets, with an accent on asset repositioning, refinancing and refurbishment. We expect new guidelines for non-banking HFCs to assist in pushing funding for the housing sector in 2013. There will be more liquidity available in the housing finance market as rules for raising external commercial borrowings will be relaxed for HFCs, and with SEBI allowing debt funds to invest an additional 10 percent in HFCs. HFCs will also look at tapping the QIP market to raise funds in 2013.