Private equity funds and overseas financial institutions such as pension funds and sovereign wealth funds have replaced banks as the largest source of funding for the real estate sector, according to the Economic Survey 2018.
The survey, tabled in parliament on Monday, said rising non-performing assets, higher risk provisioning and falling profits have resulted in banks reducing their exposure to the real estate sector.
According to the survey, the share of PE funds and these institutions in real estate funding has gone up from 14% in 2013 to 82% in 2016. On a cumulative basis, between 2013 and 2016, PE funds accounted for 57 % of the funding, followed by bank lending at 34%. Foreign direct investments accounted for remaining 9%.
PE investments in the real estate sector increased from $0.9 billion in 2013 to over $5.9 billion in 2016. In the first half of 2017, the sector received $5 billion in PE investments.
The survey also said that FDI in the construction sector rose to $257 million in the first half of 2017 from $107 million in the entire 2016. The decline in FDI in 2016 was attributed to offshore investors deploying majority of their funds through debt or structured debt. This protects their investments by providing certain fixed returns.
The revival in FDI flows was attributed to a host of factors including improving regulatory environment, enhanced infrastructure and amendments to norms governing Real Estate Investment Trusts.
Project launches, rental housing
The survey also indicated that the residential segment continues to goes through a slowdown. It cited the National Real Estate Development Council data saying residential project launches across top 14 cities in India during the first half of 2017 fell to the lowest in five years to about 58,000 units. New residential sales fell to a five-year low of about 1,01,850 units during this period.
The survey also said that the government should broaden its approach on the housing problem by bringing house rental and vacancy rates into policy-making. It added that a successful housing policy should enable horizontal or spatial mobility and vertical mobility.
Rental housing is important as it allows people to access suitable housing facilities without actually having to buy property. The survey said the share of rental housing has declined in cities from 54% in 1961 to 28% in 2011.
According to the 2011 Census, the share of households living in rented houses was 5% in rural areas and 31 % in urban areas. The census also showed that the number of vacant houses rose from 65 lakh in 2001 to 1.1 crore in 2011.
Among the 19 major cities, Mumbai has the most number of vacant houses with 4,80,000 units. Delhi and Bengaluru have about 3,00,000 units each.
The survey said high vacancy rates may be due to unclear property rights, weak contract enforcement, spatial distribution and low rental yields.