With a slowdown in sales and piling up of housing inventory, private equity (PE) firms are now shifting investments from residential to commercial real estate. In 2015, 53 per cent of PE investments in real estate were pumped into residential segment while commercial received 33 per cent, followed by retail at 7 per cent and the remaining accounted for by other segments.
By 2018, commercial realty had become the darling of PE firms, attracting 70 per cent of the funding, according to data from Venture Intelligence. The residential segment received only 7 per cent of PE funds, at par with retail. The average rental yield in residential real estate assets in India is just 2.5-3 per cent, which compares poorly with the 8-9 per cent yields commanded by office assets. Moreover, commercial leases are long-term in nature, with built-in escalation clauses, giving more stable returns on investments, which is what PE firms prefer too.
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