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Indian Real Estate in the Post-Covid-19 Era

Anshul Jain • 11/05/2022

"This article appeared on Corporate Real Estate Journal – Volume 11"

Anshul Jain heads Cushman and Wakefield, India and South East Asia. He has over 26 years’ experience that spans across countries and continents. To the real estate world, he brings well-rounded domain expertise and an exceptionally strong penchant for delivering client solutions. As a business leader, he has a sharp profit and loss (P&L) focus and an eye for operational excellence. A well-known thought leader in the sector, he writes for leading publications and is frequently invited as keynote speaker at various industry forums. Anshul holds an International MBA from IMD, Switzerland, and a Master’s in Finance (MFC) from University of Delhi. He is also a Fellow of the Royal Institution of Chartered Surveyors (FRICS). Off work, he loves playing tennis, tries golf swings, is an enthusiastic cook and loves experiencing new cities and cultures through travel.

ABSTRACT

COVID-19 forced upon the world an unprecedented number of transformative changes that not only posed significant challenges but also brought with it opportunities for business. However, India’s real estate sector had already been through its own transformative phase in the years leading up to 2019, with three major policy interruptions — demonetisation (2016), introduction of the Goods and Services Tax (2017) and real estate regulatory authority (2016). After the initial shocks, Indian real estate had begun to rebound, and it was widely expected that this would continue into 2020. But with the advent of COVID-19, real estate was widely expected go into a slump. Today, as we see things in hindsight, COVID-19 has accelerated some of the medium-term transformations that were largely expected to bring Indian real estate level with global best practices. A sustained revenue growth of India’s largest occupier segment — the IT-BPM sector — helped office gross leasing levels in 2020 and 2021 (forecast) stand similar to the average levels clocked in last six years (2014–19). Total workplace ecosystem is now a more critical factor for occupiers than office rentals and building quality. Testimony to that effect is the higher number of managed spaces (offered by co-working) in 2020 and 2021. In the retail sector, experiential retail is now seen as a major driver of growth for retailers, rather than merely securing a physical store presence. The predominantly unorganised industrial spaces are paving way for stronger demand coming for operators in the organised sector. Data centres are fast emerging, driven by the digitalisation and data localisation. These growth opportunities have naturally attracted attention from institutional investors in the real estate sector. Recent successes by maiden REIT listings in India provide impetus to investors. This paper aims to highlight these sector-by-sector understanding of the transformational forces underway in the Indian commercial real estate, and it appears unfazed by the ongoing uncertainty around COVID-19.

INTRODUCTION

Almost two years have passed since the world experienced the unprecedented outbreak of the COVID-19 pandemic. Nothing like this has been experienced before and industries across the board were affected by the sudden disruption. Indian commercial real estate was no different. Companies shut their offices and introduced work-from-home (WFH) policies, with remote working implemented throughout the corporate world. Leasing activity declined even as business continuity planning (BCP) became a priority for most occupiers.

Now, as vaccinations gain pace across the world and economic recovery strengthens, the tide seems to be turning for global and Indian commercial real estate. While the threat from variants of the virus continues and some parts of the world are affected more than others, the US and UK have vaccinated nearly half of their populations and seem to be coming out of the pandemic with healthy growth prospects in the medium term. This augurs well for Indian commercial real estate, which counts major US and European multinational corporations as its largest clientele.

Policy changes in recent years have driven formalisation of the residential sector and attracted interest from domestic and global players. In the retail space, there is gross under-penetration of organised retail, even when compared with other Southeast Asian countries such as Vietnam and Indonesia. Leading Indian cities have a per-capita retail space of below or near 1.0 sq. ft, whereas cities such as Jakarta, Hanoi have a much higher figure. As the Indian economy and incomes are expected to rise relatively faster, consumerism is expected to grow considerably, helping retailers and mall developers.

ECONOMY: LONG-TERM GROWTH DRIVERS INTACT DESPITE NEAR- TERM COVID IMPACT

The IMF has forecast a healthy global economic expansion of 6 percent in 2021. Sporadic bouts of COVID-19 are still a possibility and, therefore, developed economies having greater vaccinated populations could be recovering faster than the emerging nations. According to the IMF, vaccination is a major fault line along which the global economy is split into two blocs: those countries that can look forward to further normalisation of activity later this year (almost all advanced economies), and those that will still face resurgent infections and rising COVID-19 cases. Around 40 percent of the population in developed economies was vaccinated as of July 2021 compared to around 11 percent in emerging markets and the prospect of new variants and mobility restrictions remain in some countries.1 More recent data corroborates this view, with countries such as the US, UK, and Germany reporting 60–70 percent of adult population being fully vaccinated by November 2021 compared to around 4 percent in sub-Saharan Africa. Data coming from Google mobility reports suggests a healthy recovery in mobility at workplaces in countries such as the US and UK.

India’s economy is poised to witness a rebound in 2021 with positive growth outlook of 9–10 percent (see Figure 1). Improvement in private consumption and capital expenditure, export growth and foreign capital inflows will support economic expansion. A buoyant global economic condition and strong recoveries in the US and Europe will provide further impetus to Indian commercial real estate and the broader economy. Vaccinations have also picked up significantly since the Indian government announced vaccines free of charge for all over 18 years in June. As of late November 2021, over 80 percent of the eligible population has received at least one dose of the vaccine, while around 40 percent has been fully vaccinated. With companies across sectors implementing their own vaccination drives, a large proportion of professional staff are already vaccinated, thereby paving the way for employees to return to offices in the foreseeable future.

On the other hand, global inflationary pressures, largely due to pent-up demand and supply chain disruptions, are likely to pose near-term challenges. Central banks, including in India, are more likely to consider the elevated price levels as transitory and will continue to support economic growth. The lingering threat from future virus mutations remains on the horizon and the global medical fraternity could well recommend vaccine booster shots or newer vaccines to mitigate this threat.

OFFICE MARKET: RESILIENT OUTLOOK WITH GREATER FOCUS ON QUALITY, SUSTAINABILITY AND SAFETY

The growth of Indian commercial real estate has been driven by the office market over a couple of decades. The country is now a major operational hub for global corporations and is widely acknowledged to be at the forefront of digital transformation. Starting as a low-cost outsourcing destination in the early 2000s, it has now moved to high-end processes in sectors such as manufacturing, engineering, artificial intelligence (AI) and machine learning (ML). The pace of growth in office leasing to set up global capability centres (GCCs) has been significant in the last 5–6 years. Multinational companies, especially those from the US and Europe, have rapidly expanded across Indian cities to enable their parent organisation’s digital transformation journey. As evident in the commercial office trends, space leased by GCCs has grown fivefold during 2014–19.2 The Indian office market scaled record heights in 2019 with gross leasing of over 69m sq. ft and net absorption of 46m sq. ft in the top eight cities, with markets such as Bengaluru, Hyderabad and Pune witnessing low single-digit vacancies. In fact, India was the leader in the Asia-Pacific (APAC) region in terms of office demand in 2019, accounting for a dominant 45 percent of total office absorption in the region.3

Real GDP Growth by Country

Figure 1: Real GDP growth by country/region
Source: IMF, Eurostat

The COVID-19 outbreak in 2020 did affect the leasing momentum in the first half of the year, but by the end, the Indian market had witnessed a sharp recovery. Gross leasing in 2020 (49.3m sq. ft) was nearly equal to 2018 levels (49.7m sq. ft) and higher than in 2017 (46.4m sq. ft). One could argue that the 2020 figure is much lower than 2019, which was earmarked as the peak year of office sector leasing in recent history. In light of the pandemic, however, the office market performance of 2020 exhibited exceptional resilience.

The impact of the pandemic was felt in the form of higher vacancies in many large cities as occupiers adopted a cautious approach amid a drop in business activities and prevailing market uncertainty. Space optimisation and the need for cost savings drove leasing activities in the immediate aftermath of the COVID-19 outbreak. By the end of 2020, with developers/landlords keen to retain and attract tenants in what was essentially turning out to be an occupier’s market, fresh demand had started increasing. Some large occupiers, primarily multinational corporations, signed deals for large spaces for their medium to long-term expansion plans. Thus, India was one of the few markets in the APAC region with a positive office absorption (~21m sq. ft) and accounted for 37 percent of APAC office demand (see Figure 2).4

While the more severe second COVID-19 wave did have an adverse impact on office demand in the first half of 2021, there are indications that the sector is fundamentally resilient and that occupiers are considering India’s long-term economic outlook and other inherent strengths. As vaccinations gain pace and occupiers review their space plans and return-to-work (RTW) strategies, leasing activity is likely to experience a healthy recovery.

The second half of 2021 has witnessed an improvement in the economic outlook, which has driven business sentiments higher, while a sharp drop in COVID-19 cases and faster pace of vaccinations has led to organisations bringing forward their RTW timelines. Office space enquiries have increased since Q3 2021 and occupiers are moving ahead with their leasing plans not just for immediate requirements but also for expansion plans for the next 3–4 years. Moreover, there has been a surge in pre-leasing (of under-construction properties) across key cities such as Hyderabad and Chennai, which along with Bengaluru are known as India’s leading global tech cities. In Q2 2021, pan-India pre-leasing has jumped by a significant 14 percent year over year, with a similar positive story unfolding in Chennai and Delhi National Capital Region (NCR).   Pune too has been witnessing stable pre-leasing momentum over the last few quarters.

APAC Office Absorption Shares 2020

Figure 2: APAC office absorption shares 2020
Source: Cushman & Wakefield Research

Hyderabad and Mumbai have led the way in terms of gross leasing in the first half of 2021, with Delhi NCR and Bengaluru following close behind (see Figure 3). Major office corridors continue to perform well with low vacancies, stable rentals and healthy upcoming supply addition over the next few years, a significant proportion of which is pre-leased. Rentals too have remained stable across top cities; in fact, Bengaluru reported a rise in office rentals in 2020 despite the COVID-induced uncertainty. By the end of 2021, gross leasing is forecast to reach 45–50m sq. ft, which closely resembles levels seen in 2020 and represents a commendable performance despite challenges posed by the pandemic.

Over the long term, the health of India’s office market is fundamentally tied to the value proposition that it delivers to global businesses. A large pool of educated, skilled and mobile talent, which is available at an extremely competitive cost, along with low office rentals are inherent advantages that are driving investments in GCCs by multinational corporations. Office rentals in Bengaluru (US$1.2/sq. ft/month), Pune (US$1.1/sq. ft/month) and Hyderabad (US$1/sq. ft/month) are some of the lowest in Asia. In fact, rentals in Sydney, Singapore and Tokyo are three to five times higher than Mumbai (US$1.7/sq. ft/month), the costliest Indian office market.

Several GCCs in India have increased the quantum of high-end services offered, establishing themselves as important centres of excellence (CoEs) and creating significant value for their parent organisations. By 2019, India was home to 86 capability development centres and engineering research and development (ER&D) centres set up by Forbes 2000 companies, compared to just six in 2015. In the next five years, GCCs are expected to grow to US$60bn from around US$34bn in 2020, employing 3m as compared to 1.3m at present.5 This growth will fuel demand for new office spaces across major technology corridors, a trend which is already in progress — for example, gross office space absorption by MNCs setting up R&D centres in India has grown five-fold in five years (2014–19), and this will only rise further.

India Office Leasing by City

Figure 3: India office leasing by city (2016–H1 2021)
Source: Cushman & Wakefield Research

Indian ER&D centres are already delivering complex high-end technological solutions in domains such as ML/AI, cloud computing and Internet of Things (IoT). As the level of sophistication grows and GCCs/ ER&D centres become a key pillar of their parent organisation’s digital transformation strategy, Indian technical talent will go a step further and work on 5G, virtual reality (VR), augmented reality (AR) and robotics. More and more GCCs will collaborate with start-ups as well as academia through innovation labs, start-up incubators, hackathons and provision of research funding.6 This will help GCCs to emerge as CoEs and drive innovation in a wide range of industries.

Transformation of workplace is an important feature in the post-COVID-19 office market scenario. Employee health and security will be the most important requirement for the young, millennial workforce to feel engaged and safe at work. More and more new-age office buildings will have features such as air filters and ionisers as well as energy-saving plant-based air purification systems. Developers will experiment with energy-efficient materials and technologies and enhance usage of renewable power sources. In fact, the International Finance Corporation (IFC) estimates that green buildings in India will provide an investment opportunity of US$1.4tr by 2030, with 70 percent of the buildings that will be needed by the country over the next decade yet to be built.7

Dedensification of offices will have to be ensured and this could result in per-employee space steadily increasing in Indian offices. Prior to COVID-19, a thumb-rule considered across India’s Grade-A office universe was to have around 100 sq. ft of space per person, which has only reduced over the years to achieve space efficiency. Given the new social distancing norms and renewed focus on employee well-being (meaning spaces now devoted towards collaboration, quiet rooms, open areas, plants, etc.), this benchmark space requirement is likely to rise. For instance, if 6 ft radius social dis- tancing norms were to be followed with a 30 percent load factor in common areas, then each employee would need roughly 145–147 sq. ft of office space to achieve physical distancing8 — ie 45 percent additional demand for office space for the same workforce. Even if we assume 30 percent workforce working remotely under hybrid work format post-COVID-19, there is still an incremental demand for office space through de-densification.

Organisations might need larger offices due to the need to space out seating arrangements and provide more space per employee. Occupiers will revamp their office designs with appropriate desking spreads, visual displays and an adaptable and trained workforce, ensuring a completely functional and safe work environment. Offices will become places for collaboration and innovation, especially in high-tech and R&D centres, and are likely to have larger spaces for team engagements, discussions and collaborative exercises. The primary purpose of offices going forward will be to support collaboration, facilitate team development and drive social interaction.9

Technology and environment, social and governance (ESG) are the other important metrics based on which office projects will be rated by occupiers and investors. Globally, developers are increasingly moving towards technologies such as smart meters, smart building management systems and integrated distribution management systems through which a large quantum of data is managed.10 The trend is similar in India. Developers are deploying digital solutions and workspace management software for safe seating, air quality control and restroom hygiene.

Occupiers in Indian commercial real estate are looking to align their leasing strategies with their broader long-term ESG goals. For instance, Morgan Stanley and IBM, two large occupiers in India, have net zero emission targets by 2022 and 2030, respectively; Morgan Stanley intends to have 50 percent ‘green leases’ by 2025. On the other hand, developers are likely to focus on minimising energy usage and enhancing the ‘green’ quotient in buildings due to higher demand for such assets from occupiers and investors. In fact, global private equity giants Blackstone and Blackrock have already announced that ESG will be a key investment criterion going forward. Given that the Indian office market is witnessing greater institutionalisation, ‘green’ buildings are likely to command premium valuation over the next few years. A report released last year by the GBCI (Green Business Certification, Inc.) ranked India in the top three countries for Leadership in Energy and Environmental Design (LEED) certified projects outside of the US.11 Over the next few years, more such projects are likely to apply for LEED and WELL certification in pursuit of staying relevant and also commanding premium rentals.

Going forward, the future of work is likely to encompass a total workplace eco- system balancing home, office and third places. Team collaboration will remain critical to foster a superior office environment and the need to ensure both physical and mental well-being will be paramount.12 That said, most companies will implement flexible working policies and provide employees with the option of remote work as per their preferences and business requirements. Already, some large multinationals such as IBM and Microsoft have issued globally consistent flexible working guidelines that provide adequate choice to their employees. Large occupiers are likely to adopt a ‘core+flex’ leasing strategy due to the need to respond flexibly to business cycles and drive employee engagement and productivity.

Facility management (FM) teams will have a bigger role in creating a superior workplace experience for employees returning back to offices. Facility managers will essentially become ‘community managers’, building a sense of community and implementing workplace protocols, particularly on health and safety. FM teams will focus on three key aspects in offices: health and safety, technology and innovation, and culture and experience. They will stress stringent BCP, ensure the provision of safe cleaning and commuting solutions and implement protocols that drive a high degree of occupational health and safety.13 Facility managers will become more technologically adept, especially in touchless technological solutions such as facial recognition, elevator management and visitor management through sensors and mobile apps/QR codes. Office air quality will be monitored thoroughly and technologies for remote monitoring will become an important tool to maintain health standards in the office. Facility managers will become the first point of contact to troubleshoot workplace issues, address employee concerns and combine technical expertise with a keen eye for end-user satisfaction. Thus, the role of facility managers will change from asset management to delivering solutions covering all aspects of office operations.

Thus, it may be argued that, in the post-COVID-19 world, offices will not just be places where people go to work. The chief motivator for employees to come back to work will be the amenities provided at workplaces and creation of a collaborative atmosphere that drives ideation and innovation. Office design will have to keep pace with this trend and there are likely to be more break-out spaces and collaboration areas instead of just workstations. The need to understand the company’s culture and socialise with fellow employees will drive office attendance, especially for younger employees. Office attendance will be mandatory for employees in R&D roles, which require high levels of face-to-face interaction and collaboration, while those in sales and business development roles might not require regular office attendance. Millennial employees with high awareness levels are also likely to focus on their organisation’s sustainability initiatives and the use of energy-saving technologies.

The biggest concern of employees will pertain to their health and well-being. This is something that organisations will have to address through investment in smart technology solutions and implementation of safety protocols including regular cleaning of office premises. Office dedensification and increase in area per employee are likely to be a norm in the post-COVID-19 world. The concern around mental health has gained prominence during the pandemic and employees will look for adequate support to address this issue. Hybrid work models and providing employees with the flexibility and convenience to work at a location of choice will deliver greater employee satisfaction. Thus, given these factors, offices are likely to thrive in the post-COVID-19 world, but in a different form. Additional policies and frameworks will be in place that support office attendance, enhance collaboration and increase space demand over time.

RETAIL: ‘EXPERIENTIAL RETAIL’ AND CONSUMPTION GROWTH WILL DRIVE INVESTMENTS

The COVID-19-induced lockdown had the most significant impact on the organised retail real estate sector. Four months of enforced shutdown followed by intermittent lockdowns in select cities had a negative impact on footfall in malls. A significant part of the mall operator’s efforts during 2020 and early 2021 was spent in negotiating rental discounts, with large tenants wanting to link the recovery in rents to recovery in footfall. Prominent mall developers owing quality mall space were in a better position to defend their rents and also retain occupancy levels, whereas many Grade-B malls witnessed store closures and deep dis- counting over contracted rents. Developers have been largely supportive of their tenants by offering them options of discounts or delayed payment of rents.

New leasing of mall space has been at its lowest level, as there is continued uncertainty on the time period of malls being able to start operations unhindered. Many Grade-A malls witnessed their footfall recover to 60–80 percent of pre-pandemic levels, which was an encouraging sign, but the second wave dampened the recovery progression. Leasing continues to remain a low presence across the nation (see Figure 4). High streets gained in the process, as many new store opening plans by tenants shifted to demand for high street locations.

Mall Leasing Share by City

Figure 4: Mall leasing share by city (2017–H1 2021)
Source: Cushman & Wakefield Research

The lockdown has given prominent malls an opportunity to refurbish and reposition, with larger spaces now being planned for experiential retailing: family and entertainment centres (FEC), food and beverage (F&B), gaming zones, sports zones, etc. In fact, the growth trajectory of malls in India is likely to take a somewhat different shape as compared to Western malls, given these are considered largely as entertainment venues that drive social interaction. Interestingly, many online brands are now showing interest in opening physical stores in order to embed a hybrid retailing format. This is to ensure a deeper recall in the minds of consumers in an otherwise cluttered digital space, and also to curtail the cost of customer acquisition, which has been increasing exponentially on various digital platforms. Globally, malls are also exploring the option of ‘adaptive reuse’, whereby unused vacant space is being repurposed to generate revenues.14

With India still considered as an underpenetrated market for organised retail — retail space per capita stands at 0.5, as against 1.0 in Indonesia and above 4.0 in Vietnam — there is considerable room for growth in the retail real estate space. The stronger mall developers will be looking at significant long-term gains as weaker developers or inferior malls become less appealing to tenants in the post-COVID-19 world. Health and safety of visitors will be of prime importance and new-age technologies such as AI and AR are likely to be deployed extensively for better consumer experiences.15

INDUSTRIAL SPACES AND DATA CENTRES: DIGITAL ECONOMY DRIVING GROWTH

With the growing clout of digital economy, driven by deeper proliferation of technology and e-commerce, the demand for industrial spaces as well as data centres has been growing steadily over last few years. The pandemic has further provided impetus as the share of online marketplaces has significantly risen.

Within the broader sector, activity in the warehousing space has remained very strong. Cushman & Wakefield’s 2021 Global Manufacturing Risk Index ranks India at the second spot globally, with the country performing exceptionally well on parameters such as cost and operating conditions.16 Huge demand coming from large e-commerce players and 3PL logistics companies has resulted in faster space take-up and steady or gradually rising rents. Demand is particularly strong in the traditional warehousing markets near the outskirts of tier-I cities: Bhiwandi, Taloja, Chakan, Talegaon, Gr. Noida, Dankuni, etc. Industrial rents have been rising steadily in markets such as Delhi NCR and Kolkata, reflecting healthy demand.17 With many e-commerce players now entering into perishable goods retailing, there is an increased demand for cold storage, which further adds to the demand for warehousing space in these locations. Many of the above-mentioned micro-markets have now started to witness increase in land rates and subsequently rentals owing to rising demand. This sector has definitely received a boost in the post-pandemic world. We have seen a lot of investment interest in the overall industrial segment, which accounted for a healthy one-third share in total investment volume in the first half of 2021. Large international and domestic funds such as Indospace, ESR, Blackstone-Embassy, etc. have been very active in investment circles. Policies such as goods and tax service (GST), the upcoming National Logistics Policy, production-linked incentives (PLI) and development of integrated logistics hubs will drive demand.

Latent activity in the data centre market in India indicates a bullish undertone. Currently, close to 655 megawatt (MW) of total capacity is built and operational across the top seven realty markets in India, with Mumbai having a dominant share of over 40 percent (see Figure 5). Other markets are catching up fast, however, with many ongoing projects in Chennai, Hyderabad and NCR moving at good pace. Mumbai counts itself among the top five defined contribution (DC) markets in APAC and is also among the few markets that has touched capacities in excess of 100MW. Markets such as Mumbai and Chennai have an inherent geographical advantage of being close to the sea, which enables international submarine cable connectivity. For India, a large digitally connected population, increasing adoption of cloud services, and a government policy that mandates data storage locally, together act as big drivers of demand. Large investments have been committed by operators such as ST Telemedia, NTT, Adani, CtrlS, Princeton Digital, Digital Realty, Yondr, etc., which will lead to a doubling of India’s data centre capacity over the next five years.

Shares of Colocation Data Centre Capacity by City

Figure 5: Shares of colocation data centre capacity by city (H1 2021)
Source: Cushman & Wakefield Research

Data centres need substantial, uninterrupted power supply to function effectively and given the number of under-construction and planned hyperscale data centres in India, the need for reliable power cannot be overstated. State governments have made legislation to ensure 24x7 power supply and have also included provisions enabling operators to set up captive units. For instance, the states of Telangana, Uttar Pradesh and Tamil Nadu have dedicated data centre policies which also provide incentives such as rebates on electricity tariffs and allow operators to obtain power from renewable sources, such as solar. These will address the issues surrounding availability of power across major cities going forward.

The scope for further growth is immense, given that the DC market continues to remain under-penetrated in India. For instance, tier-I markets still average over 100,000 people per MW, whereas the same is much lower in leading APAC cities such as Beijing, Tokyo, Shanghai or Singapore.18

INVESTMENTS: INDIA REMAINS AN ATTRACTIVE DESTINATION FOR INSTITUTIONAL CAPITAL

Despite the disruption caused by the pandemic, private equity inflows amounted to over US$5bn in 2020, with the office sector accounting for 77 per cent of total investments (see Figure 6). The year saw Bengaluru emerge as a mega-investment destination, with Brookfield acquiring RMZ’s office properties and Blackstone negotiating with Prestige Group for the latter’s commercial portfolio. Foreign institutional inflows jumped by 122 per cent in 2020, driven largely by the office market.19 That investment momentum seems to be continuing in 2021 with inflows of US$3.5bn in H1 2021, although industrial space replaced office as the stellar performing asset class.20 Given the resilience of the Indian office market and continuing strong growth in industrials and data centres, the big appetite of institutional investors has a lot of ground to play with. Therefore, there is every reason to believe that the positive investor momentum will continue in H2 2021 and beyond.

India PE Inflows by Asset

Figure 6: India PE inflows by asset (2016–H1 2021)
Source: Cushman & Wakefield Research

Table 1: Comparison of listed REITs in India

 

Embassy REITs

Brookfield REITs

Mindspace REITs

Listing month

April 2019

February 2021

August 2020

Investor interest in IPO

2.57x

8.0x

13x

Listing gains (June 2021)

34% (June 2021)

(-3%) (June 2021)

3% (June 2021)

Completed area (m sq. ft)

32.3

10.3

23.9

U/C area (m sq. ft)

10.1

3.7

2.0

Occupancy

88%

91%

86.9%

(Source: REIT quarterly reports, investor presentations)

Real estate investment trusts (REITs), which were in the making long before they came into being in 2019, have enjoyed great success in India. REITs have brought a lot of enthusiasm and cheer among all stakeholders and pave the way for bringing real estate investing opportunities to small and retail investors. All three REITs received a phenomenal response during the initial public offering (IPO) stages, with the most recent IPO (Brookfield), formed in February 2021, being oversubscribed by eight times the original allotment size.

Within a small period of just over two years, India has three large REITs already trading on the stock exchange, with a combined asset ownership of over 66m sq. ft of operational assets (nearly 10 percent of the total Grade-A stock in India), and over 15.0m sq. ft of assets under various stages of construction (see Table 1). These instruments have managed to collate top-quality office spaces, whose occupancies even during post-pandemic times have been very high (88–91 percent).
As market recovery gains momentum going into 2022, some new REIT listings could happen over the next 12–24 months. Moreover, with 99 percent rent collection track record of Indian REITs even during the pandemic years and office yields still significantly higher (in the range of 6–7 percent) than in the US or other developed APAC markets, we could very well see more successful REIT listings going forward. Recent government initiatives such as allowing higher debt financing and tax benefits on dividends will improve the REIT outlook further.

CONCLUSION

Indian real estate remains resilient even as the sector continues to look at newer horizons to drive long-term growth. The office market has been the mainstay of the sector over the past several years and has become a hotbed of investments and innovation. It will continue to perform well, the short-term COVID-19-induced disruption notwithstanding. Nevertheless, developers and investors are well versed in the rapid changes that are already taking place in this segment, especially with regard to health and safety, flexibility, technology and sustainability. These trends will accelerate going forward, as is happening in the rest of the world. Over the next decade, Indian offices will emerge stronger, although in a different avatar, and continue to attract long-term institutional capital.

The residential sector has passed through some tough times in recent years but could be turning a corner supported by policy initiatives, greater affordability and rising interest from institutional investors. Property continues to account for a large proportion of an average Indian household’s asset holdings. This will not change any time soon. Recent policies have enhanced transparency in the residential segment and tilted the balance in favour of superior quality and financially sound projects. Affordable and middle-income housing continues to attract buyers with more funding available for incomplete projects. Moreover, changes brought about by the pandemic in the form of remote working have provided an additional tailwind to the residential sector due to the growing need for homeownership. Demand for larger apartments is gradually on the rise, with developers including in their projects extra space that can be used as home offices. All these factors augur well for broader market sentiments and long-term prospects of the sector.

Retail has been hit hard by COVID-19 and is likely to find its feet gradually as vaccinations rise and the pandemic abates. The growth of online shopping during the pandemic amid mobility restrictions and closure of malls has also posed the question about the viability of malls in the future. The uncertainty surrounding malls is a temporary phenomenon, however, and malls are here to stay, simply because India currently has an undersupply of premium Grade-A malls. A growing middle class and evolving consumption trends will continue to drive demand for quality mall spaces that combine shopping, entertainment and social interaction. That said, malls of the future will be different, with greater technology deployment and continued focus on health and safety.

The future looks bright for industrials and data centres, the emerging asset classes which are still at early stages of their growth curves. Rising digitisation, growing e-commerce, improving broadband and fibre infrastructure, policy incentives, adoption of technologies such as AI/ML, IoT, cloud, etc. will continue to drive investor interest in these asset classes.

In summary, the rapid evolution of the Indian real estate sector points to a future full of opportunities with world-class governance standards, construction and service quality. The next decade promises to be highly exciting.

REFERENCES

(1) International Monetary Fund (July 2021), ‘World Economic Outlook Update’, pp. 2–3.
(2) Sharma, R., Kanala, K. and Adhikary, S. (2020), ‘Global Capability Centres: Making India the Cradle of Global R&D’, Cushman & Wakefield, pp. 6–7.
(3) Thomas, S., Shatdal, S., Yeo, D., Marsden, G. and Chen, C. (March 2021), ‘Asia Pacific Capital Markets Overview – Spotlight on India’, p. 6, Cushman & Wakefield, available at https://www.cushmanwakefield.com/en/singapore/insights/apac-capital-markets-overview- spotlight-on-india (accessed 10th December, 2021).
(4) Ibid., ref. 3.
(5) Deloitte/NASSCOM (June 2021), ‘GCC Value Proposition for India’, p. 16, available at https://nasscom.in/knowledge-center/publications/gcc-value-proposition-india#:~:text=NASSCOM%20and%20Deloitte%20collaborated%20to,progress%2C%20environmental%20 sustainability%2C%20and%20reputational (accessed 10th December, 2021).
(6) Sen, A. (2021), ‘Have GCCs evolved into hubs of innovation?’, Ernst & Young, available at https://www.ey.com/en_in/consulting/global-capability-centers/have-gccs-evolved-into-hubs-for-innovation (accessed 10th December, 2021).
(7) International Finance Corporation (November 2017), ‘Climate Investment Opportunities in South Asia: An IFC analysis’, Climate Investment Opportunities Report Series, p. 61.
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