A push to build cities for the world’s most populous nation is attracting private credit investors to India just as troubles in China’s property sector weakens the appeal of investments there.

Apollo Global Management Inc. is exploring where it can put more cash after spending $1 billion on property investments, while Ares Management Corp. says more money will flow into Indian real estate. Rules restrict bank lending to the sector and India’s rapid urbanization has caused an affordable housing shortage.

The reasons to be bullish are stacking up, and Prime Minister Narendra Modi has pledged to spend more money on roads, trains and airports. Along with manufacturing, fund managers expect real estate to record the strongest deal flow in the next 12 to 24 months relative to other sectors, according to consultancy EY.

With China’s property market mired in a years-long crisis, some debt investors are favoring India. At $5.9 billion in March, India-focused capital yet to be deployed was more than twice as large as the amount of money allotted to China, the most recently available data from research firm Preqin show.

“Some of our global peers who used to operate in a big way in China are increasingly looking at India as a large market to deploy capital,” Manish Jain, partner and head of India at Ares, said in an interview.

India has become a particular hot spot in the $1.6 trillion global market for private credit, thanks to a rapidly growing economy and a ban on banks funding transactions such as the acquisition of land. A 2016 Indian real estate law to protect home buyers raised capital requirements for developers but again disallowed bank funding, opening the door for private credit.

Ares, which invested next to nothing in real estate from 2014 to 2019, has deployed nearly $1 billion of private credit in the sector since 2020, Jain said.

HDFC Capital Advisors Ltd., which has already invested the $2.1 billion it raised across two funds last year, is back in the market pitching its latest $2 billion private credit real estate fund, Bloomberg reported earlier this year. TVS Emerald Haven Realty Ltd., House of Abhinandan Lodha, Signature Global and Eldeco Infrastructure and Properties Ltd. are among the developers who’ve already won investments from the private credit arm of India’s biggest bank.

Much of the optimism stems from the official push to improve infrastructure. Modi’s government said it would lift investment by about 33% to around $120 billion in the financial year ending in March 2024. Better transport links are boosting demand for housing, especially in smaller cities and their surroundings.

Vipul Roongta, managing director and chief executive officer at HDFC Capital, said his firm is now committing capital for cities such as Lucknow, Pune and Nasik after previously focusing on six large metropolitan regions including New Delhi and Mumbai.

“A lot of developers are beginning to understand the value of a tier 2 in the 200 kilometer radius of a tier-1 city,” he said. “Ideally a homeowner will want to buy some land in an emerging area and then construct later when the highways ensure better connectivity.”

Real estate is expected to contribute 13% to India’s gross domestic product by 2025, roughly double the current level, Grant Thornton Bharat LLP estimated in an April report. Developers have turned to private lenders to provide bespoke loans to fund the increased construction activity following a surge in demand for bigger and spacious homes as a result of the pandemic.

“We are a 3 trillion dollar economy that needs significant amount of capital to grow,” Kanchan Jain, head of BPEA Credit Group, said at a Bloomberg New Voices event in Mumbai last month. “Private credit is plugging the hole of capital needed in the Indian economy. Private credit loans in India look like bank loans and generate phenomenal returns.”

But the run up in land prices, as India’s economic growth outstrips China’s, is also a source of risk. It could depress companies’ profit margins, and impact their ability to pay off debt.

“Real estate is a cyclical industry,” said Vikas Chimakurthy, chief executive officer at Kotak India Realty Fund. “With those kind of prices, what kind of returns developers will make” remains to be seen.

Back at Apollo, which has put about $1 billion into 10 transactions involving about 40 developers in India in the past two and half years, there are more gains to be made, according to Nipun Sahni, a partner.

“We will probably repeat what we have deployed,” Sahni said. The strong returns recorded so far, augur “well for Indian real estate as an asset class in Asia.”

–With assistance from Harry Suhartono.

(Updates to add to BPEA’s Jain quote in 13th paragraph. A previous version of this story was corrected to clarify in the seventh paragraph that Ares deployed nearly $1 billion in the sector, not country, since 2020.)

Source : Bloomberg

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