Investments In Real Estate Knightfrank.co.in/research

Trends in private equity investment (Q1 2021 update)knightfrank.co.in/researchInvestmentsin Real Estate

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I N V E S T M E N T S I N R E A L E S TAT ECONTENTS123Trends in Private EquityInvestments in Real EstatePrivate Equity investmentsin ResidentialPrivate Equity investmentsin OfficePage no. 05Page no. 09Page no. 1245Private Equity investmentsin RetailPrivate Equity investmentsin WarehousingPage no. 17Page no. 213

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I N V E S T M E N T S I N R E A L E S TAT ESECTION01TRENDS IN PRIVATE EQUIT YINVESTMENTS IN REAL ESTATEChart 1: USD 52 billion invested across debt and equity inIndian real estate since 2011993,2416,7924,068Q1 2021 vs Q1 2020 (USD mn)8,8378,5795,8415,212Number of Deals2,5152,2991,4043,232Amount invested (USD mn)948184Q120213,241675159581529% YoY4919921Q1202019Source: Knight Frank Research, Venture 20Note: Private equity includes real estate funds, pure private equity funds, sector-focused funds,pension funds, sovereign funds and Alternate Investment Funds (AIF), but excludes investmentsby SWAMIH fundQ12021Source: Knight Frank Research, Venture Intelligence5

I N V E S T M E N T S I N R E A L E S TAT E 2020 was a difficult year for the entire humankind whichspent a significant part of the year battling the COVID-19pandemic through stringent lockdowns. The pandemicdisrupted business activities across the globe and createdwaves of uncertainties. The impact of lockdown-relateduncertainties was evident in the PE investments in India realestate which dropped 40% YoY in 2020. Things improved significantly as we entered the new year in2021. Investor activity bounced back sharply with the declinein COVID-19 infections in India in the early months of the yearduring Q1 2021. This quarter witnessed PE investments to thetune of USD 3.2 billion which was 80% of that witnessedin full year 2020 and 48% of full year 2019. The recovery ininvestments (in value terms) was majorly driven by office andretail segments. The recovery was evident in volumes (number of deals) aswell. Q1 2021 witnessed 19 deals compared to 21 deals in theentire 2020. This sharp bounce back in investment volumeswas majorly driven by investor activity in the office andresidential segments. The recovery in Q1 2021 was driven by two major factors –spillover of certain deals from 2020 and the rise in investorconfidence due to the drop in COVID-19 infections duringearly parts of Q1 2021, which had created some ripplesof positivity in the economy. While, Q1 2021 has been anencouraging quarter for PE investments, however, theupward trajectory can be derailed by the rising second waveof COVID-19 infections in India and subsequent lockdownsin several parts of the country. The sustainability of revivalin investor sentiments will therefore depend on how soonthe second wave of infection subsides and also the pace ofvaccination.Chart 2:Share of investments by asset class in201120202015 Mix8% Mix12% Office24% Office25% Residential60% Residential57% Retail1% Retail1% Warehousing7% Warehousing5%Source: Knight Frank Research6Q12021 Mix0% Office62% Residential9% Retail5% Warehousing24% Mix0% Office71% Residential7% Retail15% Warehousing7%

I N V E S T M E N T S I N R E A L E S TAT EChart 3:Equity route has dominated PE investments in recent years, as big ticket investors who arebullish on annuity assets, are committing substantially higher risk (equity) capital201720182019Source: Knight Frank 9%DEBT2020 Q1 2021

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I N V E S T M E N T S I N R E A L E S TAT ESECTION02PRIVATE EQUIT YINVESTMENTS IN RESIDENTIALChart 4:PE (Debt Equity) investment in residential74234717368Q1 2021 vs Q1 2020 (USD mn)1,3702,0962,9132,952Number of Deals1,0281,0967121,943Amount invested (USD 201620172018201972020Q12021Source: Knight Frank Research, Venture IntelligenceSource: Knight Frank Research, Venture Intelligence9Q12020

I N V E S T M E N T S I N R E A L E S TAT E The residential segment in India hadsuffered a down cycle during the secondhalf of the last decade. The sectorbattled slowing sales velocity, stagnantor reducing end product prices, risein input costs and dearth of funding,particularly after the IL&FS and NBFCcrisis. Consequently, PE investment inresidential declined each year since2016 both in value terms as well asvolume. This cycle also saw a largenumber of unscrupulous and nonserious developers exit the real estatebusiness and serious developers withstrong project execution capabilitiessurvive. Q3 2020 and Q4 2020 saw anencouraging demand pull back after alockdown induced lackluster Q2 2020.Despite the hit on income streamsdue to the lockdown and contrary tothe perception of widespread demanddestruction during the early days oflockdown, the residential segmentwitnessed a strong growth in salesin the months after the lockdown, onthe back of historic low home loaninterest rates, pent up demand, fencesitters coming back to the market,increase in household savings ratedue to the lockdown and incentivesextended by developers and some stategovernments. Another interesting trend is that homeownership which was being deferreddue to the ‘uberisation culture’ of recentyears, has made a strong comebackdue to the pandemic. A significant percentage of homebuyersare buying new homes due to thepandemic and not in spite of thepandemic. This trend is predominantin the upgrade demand. The pandemicChart 5:The comeback of equity investments in recent years67%2011201220132014201520162017201820192020 Q1 2021Source: Knight Frank 9%56%44%32%68%34%66%EQUITY31%69%DEBThas brought office, school, collegeand regular household activities withinthe boundaries of the home, makingfamilies realize the importance ofhaving additional rooms in their houses,thereby creating a fresh demand forupgrading to larger homes which maynot have been a necessity earlier. The cumulative impact of this has beenwitnessed in the uptick in quarterlyAll-India residential sales. After thelockdown restrictions were lifted in aphased manner between Q2 and Q32020, All-India residential sales grew by5% YoY in Q4 2020 and by 44% YoY inQ1 2021. With private equity players hopeful ofnew residential business cycle, theresidential segment has witnessedinvestments worth USD 234 million in Q12021 which was 64% of that witnessedduring the entire 2020 and 38% of thatwitnessed in 2019. In volume terms(number of deals), the investmentactivity touched 100% of 2020 levelsand 39% of 2019 levels in the first 3months of 2021. The investor preference, which hadmoved from equity to debt (chart 5) inthe last decade, again tilted stronglyin favor of equity in 2020 and Q1 2021,indicating a resurgence in appetiteto take risks and hopes for the newbusiness cycle. During the lockdown in March 2020, dueto cultural inclination of Indians to savemoney, families were able to sustainusing their savings. However, thiscushion has not been replenished formany and if a major national lockdownhappens again, several families may findit difficult to make a high-ticket purchaselike housing. Hence, the trajectory ofrecovery in residential needs to bemonitored cautiously.

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I N V E S T M E N T S I N R E A L E S TAT ESECTION04PRIVATE EQUIT YINVESTMENTS IN OFFICEChart 6:Office segments received (equity) investments of overUSD 18.4 billion since 2011Q1 2021 vs Q1 2020 (USD mn)2,1482,5093,0964,0922,1681,226620Number of Deals792926393390Amount invested (USD mn)20Q120212,148161423% 92020Q12021Source: Knight Frank Research, Venture IntelligenceSource: Knight Frank Research, Venture Intelligence12Q12020

I N V E S T M E N T S I N R E A L E S TAT E The office sector continues to be the blue-eyed boy forinvestors due to the strong fundamentals of the Indiaoffice market. The investors are also emboldened by theencouraging response to the 3 REITs listed on Indian stockexchanges which provides them with a credible avenue forexit.Chart 7:Share of (equity) investments in 2016 Despite the concept of work from home gaining prominenceduring the lockdown, investors continue to bet big on thegrowth in overall office demand in India and expect theoffice demand to recover completely once the masses arevaccinated. The investors were also encouraged with therecovery in office leasing in December 2020 quarter whichhad touched 115% of 2019 quarterly average. Further, withthe consistent decline in COVID-19 cases in India betweenOctober 2020 and February 2021, several companies hadstarted calling their employees back to offices. However,the plans of complete return to office have been pushedforward by the rises in COVID-19 infections and subsequent86%Readyrestrictions in April 2021.6% In Q1 2021, the segment witnessed PE investments (equity)worth USD 2.1 billion, which was 92% of that witnessed duringthe full year 2020 and 72% of investments during 2019. Q12021 witnessed 7 deals - as many as that seen during full year2020. In 2016, 14% of investments were into new development andunder-construction projects.In the latest period of Q1 2021,55% of PE investments were in new development and underconstruction projects. In the primary reason for this increasein share of new development and under-construction assets isthe paucity of mature transactable assets in the Indian officemarket.Under construction8%New DevelopmentSource: Knight Frank Research, Venture IntelligenceChart 8:Share of (equity) investments in Q1 202143%New Development12%39%Under ConstructionMix137%Ready

I N V E S T M E N T S I N R E A L E S TAT ETable 1: 241 mn sq ft of office space was transacted in the last decade of which 80 mn sq ft were a part of India’s first three REITs with future REIT potential of at least 160 mn sq ftYearTotal area of the assetstransacted (mn sq ft)Total area of the assetstransacted (mn sq 2021.82.0202131.52.9Grand Total24122.4Source: Knight Frank ResearchChart 9:PE funds are the most active in office space followed by SWF andPension FundsShare of USD 18.4 billion investments since 201190%10% 1%PESovereign / Pension FundInsuranceSource: Knight Frank Research14

I N V E S T M E N T S I N R E A L E S TAT ETable 3:City wise investments - Mumbai takes the largestquantum of (equity) investment since 2011CityAmount invested(USD mn)Numberof 67118,36187Bengaluru,Chennai,NCR*Chart 10:Origin of PE investors investing in office assetsAmount invested (USD mn)UAE564Number of dealsIndia1,695 212Hyderabad*Singapore5,566 30Canada2,997 7OthersGrand TotalTotal18,361 87US7,539 27Source: Knight Frank ResearchNote - * Represents investments in a single deal and Grand total represents investmentssince 2011Source: Knight Frank ResearchNote: Grand total represents investments since 201115

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I N V E S T M E N T S I N R E A L E S TAT ESECTION05PRIVATE EQUIT YINVESTMENTS IN RETAILChart 10:PE (Equity) Investments in RetailQ1 2021 vs Q1 2020 (USD mn)484220922388545652Number of Deals3700280Amount invested (USD 01820192020Q12021Source: Knight Frank Research, Venture IntelligenceSource: Knight Frank Research, Venture Intelligence17484Q12020