Investment momentum to strengthen in India

The investment environment in India, which was initially affected by the pandemic in 2020, rebounded as the successful vaccination drive along with the fiscal and monetary policy support lifted economic growth.

Despite the impact of a severe second wave, private equity investments in the Indian real estate industry increased by 57% Year-on-Year (YOY) in 2021.

The real estate industry received a total of US$6.2 bn in investments across four segments: office, residential, warehouse, and retail.

Offices reigning as top investible grade office asset

On the back of resilience exhibited by investible grade office assets, office segment remained the leader, accounting for 46% of the investment pie with US$2.9 bn.

Strong occupier demand and scope to develop new Grade A warehouse spaces, boosted investments in the warehouse and industrial segments to US$1.3 bn, a 55% growth compared to last year. Greenfield projects contributed over 70% of investment.

Home ownership, which had been put off owing to the ‘uberization culture’ of recent years, made a significant comeback because of the pandemic.

The residential real estate segment got US$1.2 bn in investments, up 223% YoY, while the total investments in retail industry in 2021 stood at US$817 mn, up 271% YoY as investor interest for stable retail assets grew, allowing the retail business, which was at the epicentre of the epidemic, to recover.

Positive momentum for India continues through 2022 

Going ahead, India is likely to maintain its position as a preferred investment destination as the positive momentum is expected to strengthen further.

According to Asian Development Bank (ADB), India is likely to maintain its position as the fastest-growing major economy projecting a growth rate of 7.5% for 2022-23 on strong investment prospects against 5% for China during the same period.

The office category will continue to attract most of the investments, owing to definite return to office post the pandemic experience. An improving office space demand scenario, coupled with balanced supply environment would have a positive impact on occupancy and support rent growth.

While interest rate level in the economy is expected to go up later this year, limited availability of investible grade assets will protect large expansion of capitalisation rate which hovers between 7.5 – 8.0%.

Warehousing will continue to attract investments owing to India’s renewed focus on ‘Make in India’ programme and burgeoning e-commerce eco-system.

The residential sector has now moved into an upcycle fuelled by positive consumer sentiments on home ownership and a better prepared developer eco-system. Residential real estate will be a particularly appealing investment choice in 2022 with enhanced risk acceptance by the stakeholders as reflected in the increase in equity participation – 52% of deals in 2021 compared to 35% in 2020 and 21% in 2019.

India’s retail sector will continue to witness investment interest led by rebound of consumption demand in brick-and-mortar formats.

Overall, 2022 is expected to record even higher investment activity, because of abundant liquidity and steady cap rates. Improving economic conditions will augur well for investors across these real estate asset classes.

PE investments close to pre-COVID levels in 2021

Drivers for India
• Equity route continued to dominate PE investments in real estate
• Cap Rates for commercial assets trended lower in recent years

Sectors to watch in India 
• Offices remained preferred investment class for fifth year in a row
• PE investments in residentials reached above pre-COVID levels in 2021
• PE investments in warehousing surged by 54% in 2021

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This piece was originally published in 'Rising Capital in Uncertain Times' Active Capital Asia-Pacific Perspective (June/July 2022)'. The report aims to provide an insight into how the real estate market in Asia-Pacific performed historically and how it is predicted to play out in 2022, thereby acting as a guide for investors.

It also highlights an important theme – Environmental, Social and Governance (ESG) – for investors that are looking to expand their ESG foothold in their portfolios.