Indian realty sector recovery to impact private equity investments

V Nagarajan

Indian companies across the board have been adversely affected by the pandemic induced lockdowns. Despite the loan repayment moratoriums offered by the Reserve Bank of India (RBI) and stimulus injected by the government, companies have resorted to pay cuts and retrenchments.

While India is still in phase 1 of unlocking in the major metros, the adverse impact would be visible and get severe as the year progresses, according to India Real Estate H1 2020 survey by Knight Frank India.

In such uncertain times investment opportunities would be lower and investors would have to tread a cautious path before investing.

In H1, 2020, the all-India residential sales declined by 54 per cent.

With sales expected to slow down further, cash flows of several developers will get stretched, jeopardising the completion of projects. With this backdrop, residential developers are likely to go slow on new project launches.

While the government has implemented an Rs250 billion stressed asset fund through SBI-Caps to provide last mile funding for residential projects, this will not be sufficient as the requirement for such funds is expected to jump significantly. This is where private equity money can come in and make healthy returns.

Private equity (PE) investors coming in with last mile funds would have to keep the covenants strong to ensure timely completion of the project and should have the patience to wait till the economy recuperates before exiting.

On account of the strong fundamentals of the India office markets, the office segment had witnessed PE investments of over $13.6 billion in the previous decade with over $9.3 billion of that coming in the last three years.

The year 2019 was a landmark year for Indian office leasing with transaction activity touching a historic high of 60.6 million sq ft. (5.62 million sq m).

The Indian office market is on a strong footing on account of the vast availability of STEM talent, a robust IT industry, recent dollar depreciation, attractive destination for BFSI offshoring activities, low vacancy levels in Grade A space, cost arbitrage, expansion plans of existing occupiers and a strong demand from occupiers for under- construction spaces.

However, investors today would have to adopt an entirely different approach to evaluation.

The all-India office leasing activity has declined by 37 per cent YoY in H1, 2020.  The strong rental growth witnessed in the past few years is likely to stall in near term and may also decline in certain business districts in 2020.

Further, the element of work-from-home (WFH) will influence office leasing in the short term. While WFH is not a threat to long term fundamentals of office demand, it would pose a challenge until the pandemic exists.

The possibility of repeated lockdowns would adversely affect revenues of companies, thereby casting its shadow on office demand. Thus, the investors would have to account for these risks in their models and adjust the asset valuations accordingly.

One of our relatives had sold the ancestral property without the knowledge of the others.  What is the legal remedy available to retrieve our ownership?  Avinash, Sharjah.

As regards ancestral property, the basic requirement of any prospective investor while investing is to get the consent of all the co-owners.  

One of the co-owners cannot arbitrarily take any decision unless he has been given power of attorney and authorised by all the co-owners.  

However, he can sell his undivided share of the property but not the entire property on his own discretion.  You can file a suit for partition of the property in order to get your share of the ancestral property.   

I have invested in a project under construction and took home loan to part finance the purchase.  What are the tax benefits available while paying EMIs to the institution?  Saldanha, Dubai.

There are tax benefits for the principal and interest amount paid while investing in housing.  The tax concession is available for principal repayment upto a maximum of Rs150,000.  Similarly interest paid before obtaining possession is eligible for deduction in five instalments from the year of construction completion subject to a maximum of Rs200,000 if the property is self-occupied.  There is one more incentive available upto Rs1,50,000 for investment in housing for interest paid on loan where the stamp duty value of the unit does not exceed Rs4.5 million  This is available for investment only on first residential property.