This article has been written by Himanshu Agarwal and has been edited by Oishika Banerji (Team
).
It has been published by Rachit Garg.
The real estate sector is one of the oldest sectors in the world and has witnessed growth which is unmatchable by the other industrial sectors. The Indian real estate sector saw phenomenal rise post the as banks started disbursing loans to the individuals, developers and institutes. Prominent asset classes like residential, commercial and retail have witnessed unprecedented growth therefore. Some of the other asset classes like industrial, data centre etc have also seen traction in the recent past. This article is dedicated towards highlighting the corporate restructuring (with specific focus on mergers and acquisitions) that takes place in the real estate industry which accelerates the overall growth of the sector as well.
The contribution of real estate sector in the Indian economy can be better understood by statistical data has have been provided hereunder:
In the fast paced society, the traditional approach of generic growth and development has taken a back seat. Generic growth approach is time consuming and developing expertise in the domain results in substantial resource deployment. Some of the options explored by entities for the development are joint venture, joint development and M&A.
When 2 or more investors/ developers/ institutions form a new entity for the resource sharing, to expand their footprints in the market or any other reason which may be strategic to their business is called merger. When one investor/ developer/ institution acquires the resources/ business/ idea etc of the other investor/ developer/ institution is called acquisition. Generally, companies opt for this route to venture into new markets or strengthen their position in existing markets, acquire new expertise, become more competitive and increase profits. Some of the common types of mergers are conglomerates, horizontal / vertical merger, market and product extension.
M&A deals in 2022 have by 126% compared to 2021, primary reason cited by the industry is rise in strong domestic demand and healthy corporate financials. Furthermore, low interest rates up to H1 2022 have been an impetus to the situation.
Other than aforesaid reasons there many some of the key reasons for the rise of Merger and acquisitions are as following :
Post covid many industries such as IT sector, have started expanding their presence in the tier 2 and tier 3 cities to reduce employee concentration in the metro cities, also known as . Tier 2 /3 cities have lower infrastructure costs and availability of talent pool at lower salaries. However, the biggest challenge in aforesaid cities are limited availability of Grade A or fully compliant commercial spaces. Primarily, the key reason is limited construction knowledge and technical know how of the developer. Hence, some of the notable developers are tying up with fund houses to increase their resources to expand in tier 2 and 3 cities.
Land parcels with significant ticket size will have limited target audience or developers. Upfront payment in case of a bigger land parcel will attract some negotiation or disposition timeline would be higher. In such cases, merger between developer and landlord plays a vital role. Landlord and developer forms a new entity wherein landlord brings land as equity and developer shall bring the funds for the development. If the developer brings funds equivalent to land value then the new entity shall have 50:50 holding pattern or alternatively holding pattern would be determined by the funds injected in the new entity.
Availability of cheap funds by foreign investors / institutions and conducive environment of India has been an impetus in making India a hot investment destination. Good amount of transactions have been witnessed in the Industrial & logistic sector, this is in a nascent phase when compared to other developed countries. Some of the notable institutional players in this sector are , , etc. Organic development shall take a good amount of time hence M&A is a better alternative. Moreover, many big institutions and industrial houses are eager to create long term income yielding portfolios, without diverting their concentration from their core business, hence they prefer to acquire stable rented assets.
New age concepts are also becoming prevalent in this field such as data centres, cell towers, life science labs, financial / IT hubs, senior citizen living, co working / co living etc. Success of such projects require pre- requisite experience, domain expertise, upfront fund deployment and most important network to attract end users. Hence, comprehending above situation developers/ institutions/ PE partners with different domain expertise form the merged entity for the new development.
In the past decade Indian real estate has grown at a steady pace, moreover, the Indian real estate sector has shown resilience post pandemic crisis. Domestic demand remains strong in all asset classes, supported by government actions. Expectation and anticipation of real estate growth in the Tier 2 and Tier 3 cities is a vital factor for this sector. Considering the above factors M&A activities remained strong in the previous years and the same could be expected in the coming years. Introduction of the laws pertaining to real estate by government shall further foster the M&A activities in the coming years.
The post appeared first on .
It has been published by Rachit Garg.
Introduction
The real estate sector is one of the oldest sectors in the world and has witnessed growth which is unmatchable by the other industrial sectors. The Indian real estate sector saw phenomenal rise post the as banks started disbursing loans to the individuals, developers and institutes. Prominent asset classes like residential, commercial and retail have witnessed unprecedented growth therefore. Some of the other asset classes like industrial, data centre etc have also seen traction in the recent past. This article is dedicated towards highlighting the corporate restructuring (with specific focus on mergers and acquisitions) that takes place in the real estate industry which accelerates the overall growth of the sector as well.
Contribution of the real estate in Indian economy
The contribution of real estate sector in the Indian economy can be better understood by statistical data has have been provided hereunder:
- Real estate sector in India is to reach US$ 1 trillion in market size by 2030, up from US$ 200 billion in 2021 and contribute 13% to the country’s GDP by 2025.
- This sector contributes 2nd highest employment.
- Construction industry holds 3rd rank among 14 major sectors declared by the Indian Govt.
Reasons conducive to Indian real estate growth
- Rise of millennials – Traditionally, real estate was touted as a self use product. However, millennials have started considering this sector as an investment opportunity. Hence, significant demand has been witnessed in the residential sector.
- Government thrust- to foster the sector. I.e incentive schemes to developers developing new asset classes like IT hub, Industrial / Logistic park, rebate or tax relaxation have been introduced to first home buyers etc. Alternative housing fund (AHF) and Alternative investment fund (AIF) have been set up to compensate for the shortfall of the microfinancing of Housing financing companies and complete the stalled 1600 stalled housing projects across top cities of India, respectively.
- Relaxed rules- Government has relaxed the rules for PE investment in India, which has increased the cash flow in this sector.
- SEBI’s role- The (SEBI), comprehending the government thrust for real estate, has approved the Real Estate Investment Trust (REIT) platform, which will permit all the investors to invest in this sector. It is expected that this would be an opportunity of Rs. 1.25 trillion (US$ 19.65 billion) in the coming future.
Merger and acquisition in the Indian real estate sector
In the fast paced society, the traditional approach of generic growth and development has taken a back seat. Generic growth approach is time consuming and developing expertise in the domain results in substantial resource deployment. Some of the options explored by entities for the development are joint venture, joint development and M&A.
M&A in nutshell
When 2 or more investors/ developers/ institutions form a new entity for the resource sharing, to expand their footprints in the market or any other reason which may be strategic to their business is called merger. When one investor/ developer/ institution acquires the resources/ business/ idea etc of the other investor/ developer/ institution is called acquisition. Generally, companies opt for this route to venture into new markets or strengthen their position in existing markets, acquire new expertise, become more competitive and increase profits. Some of the common types of mergers are conglomerates, horizontal / vertical merger, market and product extension.
M&A deals in 2022 have by 126% compared to 2021, primary reason cited by the industry is rise in strong domestic demand and healthy corporate financials. Furthermore, low interest rates up to H1 2022 have been an impetus to the situation.
Key reasons for the rise of mergers and acquisitions
Other than aforesaid reasons there many some of the key reasons for the rise of Merger and acquisitions are as following :
- Expansion of real estate in Tier 2 and Tier 3 cities :
Post covid many industries such as IT sector, have started expanding their presence in the tier 2 and tier 3 cities to reduce employee concentration in the metro cities, also known as . Tier 2 /3 cities have lower infrastructure costs and availability of talent pool at lower salaries. However, the biggest challenge in aforesaid cities are limited availability of Grade A or fully compliant commercial spaces. Primarily, the key reason is limited construction knowledge and technical know how of the developer. Hence, some of the notable developers are tying up with fund houses to increase their resources to expand in tier 2 and 3 cities.
- Better bargain deal for landlord and developers:
Land parcels with significant ticket size will have limited target audience or developers. Upfront payment in case of a bigger land parcel will attract some negotiation or disposition timeline would be higher. In such cases, merger between developer and landlord plays a vital role. Landlord and developer forms a new entity wherein landlord brings land as equity and developer shall bring the funds for the development. If the developer brings funds equivalent to land value then the new entity shall have 50:50 holding pattern or alternatively holding pattern would be determined by the funds injected in the new entity.
- Portfolio diversification:
Availability of cheap funds by foreign investors / institutions and conducive environment of India has been an impetus in making India a hot investment destination. Good amount of transactions have been witnessed in the Industrial & logistic sector, this is in a nascent phase when compared to other developed countries. Some of the notable institutional players in this sector are , , etc. Organic development shall take a good amount of time hence M&A is a better alternative. Moreover, many big institutions and industrial houses are eager to create long term income yielding portfolios, without diverting their concentration from their core business, hence they prefer to acquire stable rented assets.
- Rise of alternative sectors or specialised sector:
New age concepts are also becoming prevalent in this field such as data centres, cell towers, life science labs, financial / IT hubs, senior citizen living, co working / co living etc. Success of such projects require pre- requisite experience, domain expertise, upfront fund deployment and most important network to attract end users. Hence, comprehending above situation developers/ institutions/ PE partners with different domain expertise form the merged entity for the new development.
Few notable M&A transactions and announcement
- Blackstone, one of the notable private equity investors, is bullish on Indian real estate and has significant investments INR 3.8 lakhs crore as of 2022. They are looking to invest additional INR 1.7 lakh crore by 2030.
- Post Covid in April 2021, many real estate projects were looking for the capital infusion for the completion. Assessing this sweet opportunity, HDFC Capital Advisors (HDFC capital) with Cerberus Capital Management (Cerberus), an US based private equity player, to form the platform which shall focus on the purchasing of residential inventory and funding projects which are on the verge of completion.
- To expand its footprint in Indian real estate, Blackstone in May 2021, acquired Embassy Industrial park portfolio at INR 5,250 crore (US$ 716.49 million).
- In , GIC acquired a small portion in Phoenix Mills’ portfolio (worth US$ 733 million). This is a diversified portfolio having investment in all the asset class, however primarily focus is on the retail sector.
- In , the largest deal of the standalone commercial tower by the global institutional player was observed. Ascendas India, Property Fund trustee manager a wholly owned subsidiary of Singapore-listed Capital and Investment, bought Aurum Ventures’ 16 – storey commercial tower in Navi Mumbai for INR 353 crore (US$ 47 million).
- In , Godrej Properties acquired equity shares of HDFC Venture Trustee Company in Godrej Realty, hence increasing stake from 51% to 100%.
- In , Sabha Highrise Ventures Pvt. Ltd. acquired 100% stake in Annalakshmi Land Developers Pvt. Ltd. Acquiring company is a wholly owned subsidiary of SOBHA Limited, a prominent Bangalore based developer.
Reasons which can dispel M&A
- Nowadays, unprecedented situations have increased greater fold, if a contract does not have water tight clauses to handle such situations then it can jeopardise the merged entity.
- Nowadays, ESG (Environmental, social and governance) is becoming part of corporate responsibility. Hence, most of the fund houses and PE institutions scout for partners with the same determination.
- Global slowdown and restriction on the free fund flow has been anticipated by most of the notable economists of the world. This can have a detrimental effect on the M&A.
- Merger brings two entities under one roof for the development. It is prudent for parties hereto, to do proper due diligence of the background. It has been observed that embezzlement or non compliance by the parent company have serious repercussions on the newly formed entity.
Conclusion
In the past decade Indian real estate has grown at a steady pace, moreover, the Indian real estate sector has shown resilience post pandemic crisis. Domestic demand remains strong in all asset classes, supported by government actions. Expectation and anticipation of real estate growth in the Tier 2 and Tier 3 cities is a vital factor for this sector. Considering the above factors M&A activities remained strong in the previous years and the same could be expected in the coming years. Introduction of the laws pertaining to real estate by government shall further foster the M&A activities in the coming years.
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