India’s real estate sector faced a difficult year in 2020 due to the pandemic, with investment volumes declining to USD 2.4 billion from pre-pandemic levels. While the office and retail sectors were hit the hardest, the logistics and residential sectors showed some resilience. However, the sector recovered in 2021, with investment volumes rebounding to USD 3.4 billion due to pent-up demand, government reforms and optimism about economic recovery.
Commercial office assets remain the most dominant, but residential and retail assets also increased. Investment levels in 2022 remained stable at his US$3.4 billion, demonstrating the sector’s resilience despite global economic headwinds. Investment in commercial offices continued to dominate, although other sectors such as data centers and warehouses gained momentum.
2022 also saw the largest acquisition of operating retail assets in India in five years. Commercial office investments remained the dominant asset class throughout his three years, accounting for 40-45% of total PE inflows. The residential and retail sectors showed signs of recovery in his 2021 and 2022, with logistics and warehousing emerging as a promising new sector.
Despite the fluctuations, PE investments have maintained an average of US$3 billion per year over the past three years, roughly in line with the average amount invested over the past 10 years. Value-add strategies are gaining momentum, with PE firms focusing on distressed assets, brownfield projects, land-level investments, and redevelopment opportunities seeking higher returns.
2023 is still underway and the final investment amount is not yet available. However, early trends suggest estimates ranging from $5.3 billion to $5.6 billion for the year as a whole. Office space accounted for 40% of PE investments this year, with warehousing accounting for a significant 25% share, benefiting from the e-commerce boom and increased demand for logistics infrastructure. Residential bags have a 20% share, while other alternative assets such as data centers and co-living/senior living all have a 15% share.
Global economic uncertainty and rising interest rates may pose challenges in the short term. Still, the long-term outlook for PE investments in Indian real estate remains positive due to solid economic fundamentals and urbanization trends.
The outlook for real estate investment in India in 2024 paints a complex picture with both promising opportunities and potential challenges
On the positive side, India’s GDP growth in 2024 is expected to be around 6-7%, supporting real estate demand across various segments such as housing, office space, and logistics infrastructure. Logistics and industrial infrastructure are also being promoted through the promotion of road infrastructure and production incentives provided to manufacturing industries.
Rapid urbanization continues, increasing demand for housing, equipment and infrastructure, and attracting real estate investment.
The government’s continued focus on infrastructure development, affordable housing, and regulatory reform could increase the sector’s attractiveness. PE firms are increasingly adopting value-add strategies that provide higher returns, focusing on distressed assets, brownfield projects, land-level investments, and redevelopment opportunities.
One thing to watch out for is that rising interest rates will increase borrowing costs for developers, dampening investor sentiment and potentially slowing investment activity in the short term. However, the rise in domestic interest rates is much lower than the sudden two- to three-fold increase in interest rates seen in Western countries. The ongoing global economic slowdown and geopolitical tensions may impact investor confidence and risk appetite, leading to cautious investment decisions.
The US has $600 billion worth of assets and is coming to refinance commercial real estate. Therefore, traditional Western PE investments may be partially replaced by PE companies based in Eastern economies such as Japan and Singapore. There may be valuation concerns in some segments such as office and residential, but this may be a region-specific concern due to increased supply, delaying investment until a price correction occurs . Exiting through an IPO or REIT can be difficult due to capital market volatility, which impacts investment schedules and returns.
We expect continued economic growth, selective investments in high-potential areas and value-add strategies to lead to strong investment activity in the second half of 2024. If global economic uncertainty worsens or interest rates rise significantly, investors may adopt a wait-and-see attitude and investment may remain below par.
PE funds will see increased focus on distressed assets, mergers and acquisitions, and consolidation within the sector as investors seek opportunistic deals. Overall, the outlook for 2024 is cautiously optimistic. Despite headwinds, the long-term fundamentals of India’s economy and real estate market remain strong. Investors need to be patient, selective and adopt a prudent approach to value creation and risk mitigation.
A glimpse of what we can expect in 2024
Overall PE investment in Indian real estate is expected to maintain moderate growth in 2024, potentially exceeding the estimated $5.6 billion in 2023, but not expected to reach pre-pandemic peaks. . Investors will become more selective, favoring certain asset classes that offer more stable returns. These are likely to include investments in the logistics and warehousing sector driven by e-commerce growth, production incentives and infrastructure development.
Affordable housing will receive a boost in response to high demand and government initiatives such as increased investment through SWAMIH.Other alternative assets such as data centers to benefit from the digitalization boom, and senior living to meet the needs of an aging population (approximately 1.4 billion people will enter their golden age this year)
Part of the seismic shift in the PE space is the increased focus on ESG. Environmental, social and governance (ESG) factors will become more prominent and influence investment decisions and project development. As far as technology implementation is concerned, PropTech and data analytics play a key role in identifying attractive opportunities and optimizing asset management.
SEBI’s announcement on MSM REIT is a game changer and the CRE fintech investment category will likely account for a significant portion of overall real estate investment in the coming years. Investments may move to smaller cities with potentially higher returns and less competition.
Overall, the outlook for real estate PE in India in 2024 looks cautiously optimistic. Growth may be slow, but it will be selective and driven by specific asset classes with solid fundamentals. Investors need to adopt a strategic approach to overcome challenges and take advantage of new opportunities.