Private equity funds committed $2.8 billion to Indian real estate projects in the first nine months of 2015, global real estate consultancy firm Cushman & Wakefield and Global Real Estate Institute said in a report. The funds invested across 61 deals between January and September, against $1.63 billion across 52 deals during the same period last year.

Apart from the increase in deal activity, the average transaction size too increased to $47 million, from $30 million during the same period last year.

The report adds that around two-third of the allocated capital was invested through structured debt and mezzanine debt route. Pure equity or entity-level deals that had dried up by 2012 have started to make a comeback, with 22% of the capital going into these deals.

The investments have been led by foreign funds that have committed $1.6 billion, or nearly 59% share of the total investment volume so far in 2015, followed by domestic funds that have invested around $1.2 billion. The majority of foreign capital that has been invested were from funds in the Asia-Pacific region (excluding India) followed by North America.

Interestingly, among this year’s 61 deals, 45 deals totaling $1.2 billion were struck by domestic funds, while foreign capital chased only 16 assets. Even though residential project sales have lagged in Mumbai, nearly 40% of the invested capital this year was deployed in this region, followed by the Delhi-National Capital Region (NCR). Fund managers invested 78% of their capital in these two cities.

On the other side, Sushmita Majumdar, director at Crisil Ratings, said India’s top 25 realtors make up around 95% of the market capitalization of the sector. These 25 developers also account for half of bank lending to the real estate sector and most of those facing high refinancing risk are in the national capital region (NCR).

“With net exposure of banks expected to decline by around 5% for the first time in the current fiscal – banks used to meet around 90% of the requirements of these realtors till last year — an increasing proportion of the funding gap is being bridged by costlier NCDs and private equity monies,”Majumdar said.

These 25 real estate companies face risks from as much as Rs 30,000 crore borrowings maturing in the immediate future amid high debt, weak demand and rising construction costs, credit ratings agency Crisil said.

Crisil said that recent regulatory measures such as relaxation in foreign direct investment (FDI), and recourse to funding through non-convertible debentures (NCDs) and private equity, are expected to provide some respite in the short term for the sector.

“The flipside, however, is the high returns expected by private equity investors compared with the relatively low cost of bank loans. Assuming this to be 20% per annum, the cumulative payout by the sector over a 5-year horizon can be as high as Rs 85,000 crore. This can amplify refinancing risks by an order of magnitude unless demand picks up substantially,” Crisil said.

Crisil estimates that stagnating collections in the wake of declining sales velocity had resulted in debt taken for residential projects by these developers surging by 25% to Rs 61,500 crore in fiscal 2015.

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