A tough year but signs of recovery bring muted cheer
Indian economy displayed green shoots of improvement in the July-September period, as economic activity resumed as the Unlock took hold. Real GDP still contracted by 7.5% in the July-September quarter, but compared slightly favourably to the sharp 23.9% decline in previous quarter. Resumption of activity in manufacturing and construction sectors and gradual easing of labour movement helped restore industry supply chains and put the nascent economic recovery in motion. As construction of real estate projects across major cities resumed, the construction sector contraction witnessed a substantial narrowing, at 8.6%, as compared to the steep 50.3% decline in the previous quarter. Investment demand, measured by gross fixed capital formation (GFCF), also contracted by a lower 7.3%, thereby showing an improvement over the 47% decline in the previous quarter, as the engines of the economy started chugging again. Foreign Direct Investment (FDI) inflows in the construction development sector were recorded at INR 6.7 bn during July-September 2020, a robust 3.1X increase over the previous quarter. The increase, corresponding to the reopening of the economy and decision-making, clearly emphasizes strong market fundamentals and long-term growth prospects for the sector.
Large investments in Q4 lead the year to a solid closure
The last quarter of 2020 led the year to a strong finish with capital inflows in real estate at INR 272.2 bn (USD 3.69 bn) in Q4. Despite the disruption and delayed decision making due to COVID, annual investments (INR 377.4 bn) were just 4% lower than the 5-year (2015-19) average PE inflows of INR 392.2bn.
The share of equity investments hovering around 60% both during Q4 and annually, pointed towards significant, long-term investor confidence in Indian real estate, particularly in investment-grade commercial assets. Office sector led the investment inflows with a 95% share in Q4 and 77% on an annual basis, with a high investment appetite for both core & core-plus assets and greenfield developments. With two successful REIT listings and more in the offing, investible-grade rent-yielding office assets in top cities are becoming increasingly attractive.
Even though large office transactions overshadowed all other asset classes, the residential, industrial and data centre segments also attracted investors’ attention with respective shares of 9%, 7% and 5% annually. Investments in industrial segment maintained a steady pace with inflows of INR 25.6 bn (USD 0.35 bn) in 2020 as marquee investors see healthy long-term prospects in this space, especially with a shift in consumer behavior favouring online retail leading to higher demand for warehousing from e-commerce and 3PL players.
Click here to download the India Investment Marketbeat Q4 2020.