‘Residential Sector Has Seen Highest Investment Traction’
Why is India still a preferred choice for investments?
India has been attracting real estate investments at a healthy pace for the past few years. Few of the key reasons that make India an attractive investment destination are the strong underlying economic and demographic fundamentals. India replaced UK as the world’s fifth-largest economy in 2022 and is likely to become the third-largest economy by 2027, surpassing Japan and Germany. Moreover, expanding regional trade with several key large economies, in addition to the existing FTAs, is expected to boost India’s commerce and trade. In addition, India has been home to the largest base of digitally skilled talent pool globally, with talent availability at a competitive cost. These factors point to a high investor sentiment that is likely to prevail in the year ahead. Over the past five years (2018-22), the average annual investment inflow in the real estate sector has been ~ $6-7 billion, and we expect a similar range in 2023.
Who are the biggest investors?
Institutional investors have consistently been a major source of capital deployment in Indian real estate. They accounted for over 42 per cent share of investments in 2022, followed by property companies garnering over 32 per cent share of capital flows. A similar trend prevailed during 2018-22 as well, wherein the institutional investors accounted for nearly-half ($15.7 bn) whereas the property companies accounted for one-third ($10.4 bn) of the cumulative investment flows. We expect that institutional investors would continue to be a prime source for capital raising activity, primarily as funding from banks and NBFCs remains limited through the equity route.
An interesting trend that has emerged over the recent past is that with limited availability of investible-grade assets in core markets / Tier-I cities for acquisition, the focus on opportunistic bets is gaining momentum. Institutional Investors are now more open to participate in greenfield developments either through joint ventures / joint development platforms or are even going solo, reflecting their confidence and conviction in the growth potential of India.
Over the past five years, over a dozen foreign institutional investors, asset managers and developers have forayed into the Indian real estate sector. Of these, a majority of the investors were based in the APAC region in countries such as Japan, South Korea, Singapore and Australia. Furthermore, existing investors with limited exposure to the real estate sector have upped their game in the recent past through multiple acquisitions and partnerships.
What are the reasons behind residential sector seeing higher traction in land acquisition since the last five years?
The residential sector has seen the highest investment traction, with roughly 37 per cent of the land acquired since 2018. This is due to the strong momentum in housing sales that the sector has seen over the past two years, thereby enabling the developers to ride the wave. The year 2022 ended on a strong note, with sales climbing to an all-time high and unit launches touching a decadal peak. The continued strength of the sector was attributable to the increased need for home ownership, especially in the affordable and mid-end categories, which have been key drivers of sales and launch activity in the sector.
The land acquisition space has been evincing higher interest primarily from developers in the recently. On a cumulative basis, a total of nearly 6,800 acres of land has been acquired across developer and investor categories. The activity has accelerated specifically in the past two years, with nearly 60 per cent of the land having been acquired since January 2021 alone. We expect sales and new launch activity to exceed the five-year average and stay above the 200,000-unit mark in 2023. As in 2022, we expect apartment launches to remain robust this year as well, with Mumbai, Hyderabad, Pune, and Delhi-NCR driving supply infusion in 2023. Home ownership sentiments would remain high, hence, residential sector would see continued investor interest.
Why do you think Industrial and Warehousing sector is witnessing heightened activity since 2018?
Industrial and logistics (I&L) leasing activity grew by about 8 per cent Y-o-Y to touch 31.6 million sq. ft. during 2022, almost touching a pre-covid peak of 32 million sq. ft. recorded in 2019. The uptick in space take-up was despite global headwinds, slowdown in e-commerce demand, and the dissipation of the post-pandemic need to hold additional inventories. 3PL players accounted for about half of the annual space take-up, driven by heightened demand from interlinked stakeholders across the supply chain and the need to shore up distribution capabilities. The I&L supply is forecasted to exceed 2022 levels and rise to 24-26 million sq. ft. in 2023. The stronger pipeline is attributable to the completion of pent-up supply.
Industrial and warehousing was another prominent sector that has seen heightened activity, specifically during the pandemic (2020 and 2021). The sector accounted for about one-fourth share of total land acquisition done during 2018-22. The reasons include shorter construction timelines, limited completed investment-grade warehousing assets, an evolving ecosystem and consumption patterns that makes a strong case for investments in the I&W (Industrial & warehouse) space.
What are the top trends that are going to shape the investment activity in 2023?
Data Centres (DC) are the top real estate alternate choice for investors across the globe – a trend we have recorded over the past few years. It is noteworthy that investors have committed about $3 billion of the capital for greenfield DC projects in the country.
We anticipate that the equity flows would remain steady over the next two years, with about $12-13 bn of cumulative inflows expected during this period. Going by the historical and prevalent trends and the available capital with the existing investment platforms that have been raised over the past 2-3 years, we expect the office sector to continue to garner a majority share of the total institutional inflows, followed by the I&L sector and site / land parcels. We believe that metros and tier-I cities would continue to be the major recipients of equity inflows during this period. Tier-II cities could see increased investments on the back of increased real estate development activity backed by healthy demand, particularly in the retail and I&L sectors.
