Investments in Indian real estate are expected to grow by 14.6% to Rs 396 billion from Rs 346 billion in 2020 as institutional investors continue to be bullish on Indian real estate asset classes such as offices, data centers and warehouses and are looking to deploy their existing dry powder, Colliers has said in its report.
Between 2018 and 2020, an average annual supply of over 35 million square feet (3.3 million square meters) entered the top six Indian cities (Bengaluru, Chennai, Delhi NCR, Hyderabad, Mumbai and Pune), with the majority being snapped up by institutional investors. Even though a similar level of supply is set to enter the market, some investment firms are increasingly looking towards developing their own greenfield office assets, it said.
Investors remain bullish on the long-term prospects even as they target an internal rate of return (IRR) of about 17-18%, the report said.
“The investment climate in India is very buoyant with global investors’ interest in real assets getting stronger. Further, the resilience of the Indian market is also evident from continued good housing sales performance across various markets, the large institutional investments in commercial office and industrial parks, and the listing of two REITs in the past six months,” said Piyush Gupta, Managing Director, Capital Markets & Investment Services (India) at Colliers.
Commercial office assets accounted for over 55% of total Indian real estate inflows between 2018 and 2020, showing the higher appetite of investors. However, there is now limited availability of investible office stock.
Colliers believes that this is an opportune time for funds to enter the market and explore last-mile funding for projects in the residential sector. The residential sector is slowly witnessing an improvement in sentiment led by decadal-low mortgage rates and rebates offered by developers.
“Whilst 2021 may be a year of consolidation and portfolio optimization for occupiers of commercial offices, they will return to growth as confidence in economy increases vis-à-vis the roll-out of COVID-19 vaccines. Demand for industrial and logistics parks will only grow due to the inherent domestic demands, adequate government support and the China + 1 strategy that global manufacturers are following. Hence, institutional investors are spoiled for investment choices as they also have data centers and housing projects to chose from,” said Siddhart Goel, Senior Director & Head, Research at Colliers International India.
Investors with a long-term horizon may scout for greenfield data centre assets as they yield more attractive returns than brownfield assets. Tier 3 and Tier 4 DC asset class can provide a net yield per annum that is higher than other operating assets, making them attractive for institutional investors, Colliers said.
Over the next decade, a developer’s strong DC portfolio can also be converted into a REIT, led by a strong appetite for income-yielding assets, it said.
India’s industrial and logistics warehousing sectors are garnering significant interest from institutional investors. Led by robust demand from e-commerce and other consumer-led occupiers, Colliers expects the industrial and logistics sectors demand to be stronger than other asset classes. During 2021, they expect increased number of joint ventures between developers and investment funds to expand and develop industrial parks, and fulfillment centres in Tier I and II locations.
Therefore, demand for core assets located in strategic locations with connectivity to ports, national highways and airports is likely to remain strong, it said.
“Warehousing deal activity continued to grow in 2020 supported by strong demand from e-commerce players, consumer electronics, and pharmaceutical sector and 3PL providers. This year too we are seeing healthy growth from 3PLs and local transportation businesses serving the population base in Tier II and Tier III cities. Development activity is expected to continue expanding in Tier I and II cities with several large developers and institutional players announcing new projects and acquiring land to develop logistics parks,” said Shyam Arumugam, Senior Director, Industrial & Logistics Services at Colliers.