Leading Real Estate Website in India Highlights Role of PE in Indian Realty

According to a real estate website in India, lending to builders by banks has more than halved over the past two years. Lending by banks stood at 55 percent in 2014 but last year fell below 24 percent. The poor performance by the countries real estate sector has been stated to be the decrease in lending by banks to builders.

Why Builders Are Considered Riskier by Banks

The high proportion of non performing assets on the balance sheet of builders have led banks to lower lending to builders. Greater provisioning for risk and rising losses in the real estate sector have also led banks to extend less credit to builders in the country.

New Sources of Funding

While builders who construct propertyin India are losing their charmed status in the eyes of banks, private equity players have been lending to builders and their funding accounts for sixty percent of the funding received by builders. Notably, the proportion of funding from private equity players to builders comprised a mere 20 percent of the funding received by builders seven years ago.

According to this real estate website the funding received by builders from private equity players is not restricted to PE firms buying equity in the builder, rather the funding to builders from private equity players has moved on to a quasi equity structure.

The Scenario in the Past

Seven years ago Initial Public Offerings were the preferred means for builders to raise capital, yet today because many builders are perceived to have a poor credibility this route to raise money is no longer as viable for builders. Private equity players share of investment dropped from 3.6 billion dollars in 2015 to 3.1 billion dollars last year. The average deal size last year was 56 million dollars.

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What the Future Holds

Real estate in India is almost certain to mature in the future and changes in the regulatory framework and market forces will ensure that PE firms play an even larger role in Indian realty in the future. Notably, currently the huge excess inventory of real estate in India has driven private equity players to shift their focus to investing in commercial space rather than investing in residential space.