Foreign capital inflow in Indian commercial real estate jumps threefold

[ecis2016.org] Increased capital inflows over the past five years, indicate that global investors have become interested in India’s commercial real estate segment

According to statistics, foreign capital flow in real estate increased threefold to $24 billion in the previous five years. Global investors have become interested in investing large amounts in Indian real estate in the last four to five years, according to a report by Colliers-FICCI.

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The share of foreign investments in Indian real estate has jumped to 82% during 2017-2021, as against 37% in the preceding five-year period. During this period, the office sector accounted for 43% of the total foreign investment, followed by the mixed-use sector, which accounted for 18%. The industrial and logistical sectors surpassed the residential sector in terms of investment. Following the NBFC crisis and low residential sales, foreign investors remained wary about the residential sector. However, in 2017-2018, foreign investments in Indian real estate increased to 82%.

Changes in government rules may boost data centre real estate

The Indian government has recently made data localisation strategies, apart from granting infrastructure status to the data centre industry. These measures are likely to encourage the building of new data centres in the country. Since 2017, the combined percentage of the US and Canadian investments in international assets has exceeded 60% year on year.

Despite the hurdles created by the pandemic, the US and Canadian funds continue to support industrial assets, in addition to office and mixed-use properties. Likewise, the majority of Asian investments are focused on the office, industrial and logistical sectors.

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How does India’s investment landscape look?

Global funds have increased their involvement in the Indian real estate business in the last decade. In terms of reforms, 2016 was a watershed year for the Indian real estate industry.

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Regulatory reforms such as the Real Estate (Regulation and Development) Act (RERA Act) and the Goods and Services Tax (GST), as well as a drive for affordable housing and changes to Real Estate Investment Trust (REIT) regulations in 2016, boosted investor confidence and international investment. As shown in the graph below, foreign capital flow into real estate increased threefold from 2017 to 2021, reaching USD 24 billion.

The provenance of investors in the overall capital flow, as recorded by Colliers, is used to determine the foreign capital flow.

Investments in commercial real estate in 2021

In spite of the Covid-19 outbreak, the overall investment climate in APAC has remained stable. Commercial real estate activity remained strong in 2021, with real estate investments reaching historic highs. Long-term confidence in the region and diversification opportunities led to this stability. Total real estate investments in APAC reached USD 870.5 billion, including income-producing buildings and assets and construction sites. Investments in income-producing buildings and assets reached new highs in 2021, totalling USD 205.4 billion, accounting for over a quarter of all investments, according to the report.

All business dispensations had a moderate to major adjustment shift in 2021 due to the global crisis and real estate was one of them. The advent of remote working protocols resulted in rapid infrastructural advancements. It led to a flourishing demand for housing estates in tier-2 and tier-3 cities. New opportunities opened up in the domain of affordable housing and commercial spaces. New-age business models like e-commerce and fintech were kept in mind while modifying these spaces. There has been exponential growth because of the location-agnostic digital operating formats of businesses.

Furthermore, as people become less reliant on big cities, demand for commercial space in tier-2 and tiet-3 cities is likely to rise. Pragmatic government policies in recent years have also aided the sector’s advancement. Stamp duties have been decreased in various states to stimulate investment. Lending rates for home buyers are at an all-time low and with lucrative tax breaks. The RERA Act of 2016 ensures transactional transparency and the regulations allow 100% FDI in construction, leading to a considerable inflow of cross-border funding.

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Real estate and policies

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In addition to India’s economic rebound and better revenue visibility, policies encouraging modern infrastructure, low-interest rates and holistic growth are driving investments across all real estate asset classes.

The growing demand for dedicated local warehouses by e-commerce entities for last-mile delivery and increased demand from fintech, education, media and content enterprises, has fuelled investment in the warehousing, logistics and data centre sectors. India’s data centres currently have 445 MW of capacity with another 290 MW scheduled to be built in 2022. REITs have established themselves as a viable alternative to traditional real estate financing.

Let us look at some significant data about these income-building assets.

• In 2021, the office sector remained the most favoured asset class, accounting for 42% of income-yielding assets, a significant decrease from pre-pandemic levels.
• Investments in the industrial and logistics sector nearly doubled to USD 56.4 billion in 2021. This was due to a surge in demand from logistic operators. It constituted a 27% share of income-yielding assets.
• The rise of new assets such as logistics and warehouses, data centres and business parks are supporting the investment revival.
• In 2021, investments in retail generated USD 40.3 billion. This was 20% of the total income, an increase from 17% in 2020. This boom in retail was caused due to the public desire for larger shopping malls.
• Overall, income-producing properties grew their proportion in the market. They went up from 18% in 2020 to 24% in 2021. However, development site investments decreased.

How did India come back on the Asian investment radar?

During the pandemic, Asian countries’ investments, which had begun to grow in India, witnessed a drop in 2020. In 2021, however, the share of Asian institutional investments returned to pre-pandemic levels. Singapore attracted the majority of Asian capital, which was directed toward office, industrial and logistics assets. Apart from private equity (PE) firms, Asian corporations have made significant capital commitments.

In the last five years, Mertz (Korea), Sumitomo Corporation (Japan) and Marubeni Corporation (Japan) have made capital allocations in Indian real estate for the first time through diverse avenues such as direct investments in projects, FDI and capital supply to dedicated real estate funds in India. The majority of the capital has been invested in office and residential properties. CapitalLand and Keppel Land, both based in Singapore, have made investments in Indian real estate, according to the Colliers-FICCI report. The majority of CapitalLand’s money has been invested in offices, industries, logistics and data centres. Keppel Land, on the other hand, has invested in residential and mixed-use projects.

What future changes can we expect in commercial real estate?

While affordability is always a top priority, sustainability is now an existential necessity. New projects must strive for carbon neutrality, whether through sustainable building materials, the optimal use of on-site natural resources such as sunlight and wind for power generation, or the greening of the development area. Given the pandemic’s challenges, real estate developers would be wise to include failsafe ventilation and sanitation systems in all ongoing projects.

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