India - The CRE Investment Hotspot
Investors and real estate companies have a lot of hopes riding on the CRE market, generally in the APAC region and centering around India. Was this something that the pandemic highlighted or had India always been a hotspot for CRE investment? Let us explore.
The measure of success of any nation depends on its economy and how well it has been doing historically. All that depends on how well the businesses and markets therein perform. If one can take any learnings from the recent pandemic-induced slowdown globally, it makes sense that investment flows into sectors that are the most resilient in times of duress and those which are most insulated from the market changes. What has been notably seen in the past one year of uncertainty – is the comparable stability that commercial real estate has shown. Almost every market, domestic or international, has seen commercial real estate (CRE) brave the pandemic slowdown in its own capacity and flexibility. Investors and real estate companies have a lot of hopes riding on the CRE market, generally in the APAC region and centering around India. Was this something that the pandemic highlighted or had India always been a hotspot for CRE investment? Let us explore.
India has been a hub of development and growth. The entire scenario of growth is fueled by the availability of space for infrastructure, a large pool of talented workforce, and various other economic factors. As per a Knight Frank report, these are a few of the key reasons why investing in India is a great opportunity –
- Political Stability and Growth Focused Government
- Strong Macro-Economic Fundamentals
- Indian Real Estate Market
- Diversity of Locations
- Market Liquidity
- Higher Yields
Political Stability & Growth-focused Government
The current government has had a lot of mandates that it has promised since coming to power. Quite a difference in speed, tenacity, and boldness has been observed in the decision-making process, at least in the business segment. Many critical decisions have been taken to revive the stagnating economy, including liberalizing foreign direct investments in sectors (especially real estate), boosting the manufacturing sector with the “Make in India” campaign, providing a catalyst to the infrastructure sector, and controlling fiscal deficit by cutting subsidies, etc. India’s sovereign credit rating has been upgraded to “Stable” by Standard & Poor (Credit rating agency) recently and the world has taken note of the same.
Strong Macro-economic Fundamentals
There has been a healthy average growth rate of 7.02% for the Indian economy over the last seven years. In addition to this growth rate, increased consumption from strong domestic demand, high investment activity, and reducing current account deficit and fiscal deficit is expected to further propel this growth.
Indian Real Estate Market
There is a diverse range of property segments available in the Indian real estate market. The residential segment is the largest due to increasing urbanization and large housing needs. The situation arising from the pandemic further added to the requirement of homes that could also serve as an office, due to the work from home tenure. At the same time, the requirement for Grade A spaces has also bumped up, wherein ergonomics is the primary focus as a future-proof feature against such global situations. While individual investors mostly look at residential real estate, interest in commercial real estate is rising among retail investors. This covers office spaces, warehouses, retail spaces, and logistics. The recent notification of the REIT policy has made commercial real estate more attractive for both domestic and international investors. Approximately USD 96 Billion worth or 1.4 Billion sq. ft. of occupied space across the office, retail, and warehouse segments could potentially benefit from the REIT opportunity. In addition to that, interest in fractional ownership is also picking up pace gradually.
Diversity of Locations
It is not like the rich market of real estate is limited to only a few locations. Sub-markets within markets and even remote locations are picking up pace now when companies are looking to open offices that are closer to the talent pool they wish to harness. Independent demand drivers contribute to the growth of the commercial real estate market across different cities. The top destinations for commercial real estate investment include Bangalore, Delhi-NCR, Hyderabad, and Mumbai. Bangalore, Delhi, and Mumbai combined account for more than 60% of the commercial investment activity. Pune, Chennai, and Hyderabad are also seeing a similar trend of growth even now.
Since the last 15 years, India has seen foreign investment to the tune of USD 341 billion out of which 10% was for the real estate sector. Investors in India include domestic institutional investors, family offices, ultra-high net worth investors, real estate funds, retail investors, and large global institutional investors. Tie-ups of Indian financial institutions and regional developers with many sovereign funds have been done to acquire core assets. The real estate market is expecting higher liquidity with the emergence of REITs soon. In addition to that, the interest in fractional ownership is also picking up, which is a great alternative to REIT in the commercial real estate space.
With yields from commercial properties at around 8-11% and from residential properties at around 2-4%, India is one of the most lucrative markets for real estate investments. The high rate of return contributes to India being a CRE investment hotspot. Foreign investors have already bought rent generating commercial assets worth more than USD 2 billion in India in 2014. That is a four-fold increase compared to 2013.
With the above parameters in mind, it is no wonder that the submarkets in India are a great destination for both retail and institutional investors. The top markets in India are Delhi &NCR, Mumbai, Bangalore, Hyderabad, Chennai, and Pune, with the office pace stock being the highest in Delhi, Mumbai, and Bangalore. If you are still thinking to stay on the sidelines, you should rethink your strategies again. If you are looking to get started with commercial real estate and want to get your feet wet in this stable investment option, please visit us at www.strataprop.com. to find out how we can help.