This article has been written by Himanshu Agarwal, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution and has been edited by Oishika Banerji (Team Lawsikho).
It has been published by Rachit Garg.
Table of Contents
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 a phenomenal rise post the 2008 global financial crisis as banks started disbursing loans to individuals, developers and institutes. Prominent asset classes like residential, commercial and retail have witnessed unprecedented growth. Some of the other asset classes like industrial, data centre etc have also seen traction in the recent past. This article is dedicated to highlighting the corporate restructuring (with a 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 the real estate sector to the Indian economy can be better understood by statistical data has have been provided hereunder:
- The real estate sector in India is expected 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.
- The 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 hubs, Industrial / Logistic parks, rebates 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 micro financing of Housing financing companies and complete the stalled 1600 stalled housing projects across top cities of India, respectively.
- Relaxed rules- The government has relaxed the rules for PE investment in India, which has increased the cash flow in this sector.
- SEBI’s role- The Securities and Exchange Board of India (SEBI), comprehending the government thrust for real estate, has approved the Real Estate Investment Trust (REIT) platform, which will permit all 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 resource sharing, to expand their footprints in the market or for any other reason which may be strategic to their business is called a 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 mergers, market and product extensions.
M&A deals in 2022 have increased by 126% compared to 2021, the primary reason cited by the industry is a 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 follows:
- Expansion of real estate in Tier 2 and Tier 3 cities :
Post covid many industries such as the IT sector have started expanding their presence in tier 2 and tier 3 cities to reduce employee concentration in the metro cities, also known as the hub-spoke model. Tier 2 /3 cities have lower infrastructure costs and availability of talent pool at lower salaries. However, the biggest challenge in aforesaid cities is the limited availability of Grade A or fully compliant commercial spaces. Primarily, the key reason is the 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 sizes will have a 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, a merger between the developer and landlord plays a vital role. Landlord and developer form a new entity wherein the landlord brings land as equity and the developer shall bring the funds for the development. If the developer brings funds equivalent to land value then the new entity shall have a 50:50 holding pattern or alternatively holding pattern would be determined by the funds injected in the new entity.
- Portfolio diversification:
The availability of cheap funds by foreign investors/institutions and the conducive environment of India have been an impetus in making India a hot investment destination. A 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 Indospace, ESR, Blackstone 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 sectors:
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. The success of such projects requires 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 worth INR 3.8 lakhs crore as of 2022. They are looking to invest an additional INR 1.7 lakh crore by 2030.
- Post Covid in April 2021, many real estate projects were looking for capital infusion for completion. Assessing this sweet opportunity, HDFC Capital Advisors (HDFC capital) collaborated with Cerberus Capital Management (Cerberus), a 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 the Embassy Industrial park portfolio at INR 5,250 crore (US$ 716.49 million).
- In June 2021, GIC acquired a small portion of Phoenix Mills’ portfolio (worth US$ 733 million). This is a diversified portfolio having investments in all the asset classes, however primary focus is on the retail sector.
- In November 2021, 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 March 2021, Godrej Properties acquired equity shares of HDFC Venture Trustee Company in Godrej Realty, hence increasing the stake from 51% to 100%.
- In January 2021, Sabha Highrise Ventures Pvt. Ltd. acquired a 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 have been anticipated by most of the notable economists of the world. This can have a detrimental effect on the M&A.
- The 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 has 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. The introduction of the laws pertaining to real estate by the government shall further foster M&A activities in the coming years.
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