The year 2021 is likely to witness acquisition of real estate projects by players with stronger balance sheets and partnerships of such players with equity capital providers. With lower asset prices, it would be a good time to enter as equity investor and/ or acquire assets either completed or under development.
The credit squeeze for real estate in India continues and hence opportunity of credit funds shall continue until Indian lending institutions find solutions to their existing book and there is management positivity to deploy capital in real estate.
If one were to look at 2020, the global economy last year went through one of the most difficult times in the history for past decades and as was the pandemic which struck around the globe. But, if we take a close look at Indian real estate performance, the recovery has been remarkable since August 2020.
For instance, if we look at a market like Mumbai, the flat registration data shows highest sales in these months compared to same period in the past many years. Similarly, even office market continues to show resilience with large owners of office spaces continue to report more than 90 percent occupancy and more than 95 percent collection efficiency. But yes, the year 2020 has been disruptive, the COVID-19 will change the way business is done in several ways on product side – quality, size, sustainability, safety and financing side – reliability, innovative structures, cost and capital stack and all these factors take center stage.
If we look ahead, various real estate asset classes are providing unique opportunities for investors. To start with, residential demand is back due to low interest rates, price recalibration, demand for larger houses in large complexes, benefits, such as stamp duty and income tax benefit to sell at a lower price.
There is not only pent up demand but also incremental due to structural changes on account of COVID-19. Consolidation is likely to be accelerated and large developers will acquire land parcels and take over stuck projects. End user pricing could harden from current levels due to limited supply and consolidation. The year 2021, is likely to witness acquisition of projects by players with stronger balance sheets and partnerships of such players with equity capital providers.
With lower asset prices, it would be a good time to enter as equity investor and/ or acquire assets either completed or under development. The credit squeeze for real estate in India continues and hence opportunity of credit funds shall continue until India lending institutions find solutions to their existing book and there is management positivity to deploy capital in real estate.
With regard to office real estate too, the second half of 2020 had lot of positives. The industry saw some landmark large deals such as acquisition of RMZ portfolio by Brookfield, Blackstone acquisition of Prestige Portfolio, successful listing of Mindspace REIT, acquisition of Embassy Tech Village by Embassy Office Parks REIT, sale of units by Blackstone in secondary market of Embassy Office Parks REIT.
These transactions reflect structural positivity and India’s attractiveness for global occupiers and investors. 2021 will witness more REITs, such as Brookfield with Institutional and Retail Investors participating.
With limited Grade A Office supply, investors would want to partner with land owners for developing Grade A office space. The acquisition of strata offices likely to see more of aggregators, such as Strata and Propshare entering this market and may create alternate to REIT for Retail Investors would want to control asset with limited capital.
REITs is also a good option to invest in commercial real estate for retail investors due to access to large portfolios – REITs are investing in large Grade A Office Complexes and different cities and hence the exposure is wide spread; Recurring and stable income – As per SEBI norms, 90 percent of income earned is to be distributed by the REIT, hence REITs provide consistent quarterly dividends to Retail Investors.
Other reasons include, Low Development Risk – REITs in India have to invest minimum 80% in completed Assets and hence there is low Development risk; Liquidity – REIT units are liquid and traded on stock exchanges and hence entry and exit at any point of time are easily exercisable; Returns with upsides – REITs are distributing dividends in the range of 7 percent. Further, there are upside potential in case of rental increase, compression of cap rates, and acquisition of new assets.
Demand for consumer goods has increased significantly resulting in setting up of warehouses in and around urban areas, in city fulfilment centers. Potential for building portfolio of warehouses and world class infrastructure has resulted in investors looking to invest and partner with established players.
The thrust is now on large industrial or logistics parks to build cost competitive infrastructure to cater to both Industrial as well as logistics sector. The moving of various facets of manufacturing from China to India is turning into reality and would see gradually opening faster once businesses and travel open. Investors and developers having global reach to occupiers would be keen on partnering with local landowners for development of large logistics parks.
Domestic and institutional investors would continue to look at yielding assets as part of the portfolio. Warehousing Assets REIT could be reality in next 3-5 years’ time in India, once the market gains the size.
Data Centers as a sunrise sector is likely to gain significant traction for investment and building campus style complexes. The demand for data has increased exponentially over past few years and more so post COVID-19 due to increase digital banking, data localisation policy in India, e-commerce transactions, OTT platforms, availability of cheaper data.
Large technology and infrastructure players are looking to invest and build quality assets. Currently, the Data Center business is likely to provide yields in the range of 16-18 percent in India, which is attractive for stable and operating assets and asset prices could go up with compression of yields as the Industry matures. We are likely to see some large global investors forming Data Centers focused Investment platform.
After chaos, there emerges an opportunity to invest for businesses and the same will be true for the real estate sector.