Investment Outlook , Published Jan 18, 2018
The headlines around real estate continue to be negative as investors are faced with stagnation and in many cases erosion of values for land and residential assets. However, on the other side we are seeing the institutionalisation of the real estate market with participation from large global private equity players, pension and sovereign funds who are seeking yield, and a steady increase in capital values. With REITs and InvITs offering exit options for funds, we are now seeing the emergence of different asset classes within commercial real estate including office, retail, hospitality, warehousing, education assets (including student housing), co-working, worker and industrial housing.
Commercial Markets: Investors Remained Active
As per Colliers, in the first nine months of 2017, about 28.9 million sq. ft. was leased at par with 2016. Grade A income yielding commercial leased assets should remain in demand as we should see the first REITs listed in 2018.
REITs (Real Estate Investment Trusts) as an alternative investment vehicle, have a significant opportunity in India. It is estimated that India currently has a rent-yielding office and retail inventory to the tune of 350 mn sq.ft., valued in excess of USD 70 bn. (INR 4.5 tn.). Furthermore, other rent-generating real estate assets such as warehouses and hospitality assets, too, have significant REIT-able stock. This would enable developers and asset managers to raise funds, which are expected to reduce the liquidity deficit in the sector.
Warehousing – Industrial Sector: Positively Impacted, With Investment on the Rise
Implementation of GST has acted as a catalyst for the rise of the warehousing market in India, by eliminating a multi-layered tax system and state borders, thus, creating a fair marketplace across the country. Consolidation in the warehousing sector is expected to gain momentum in the short-to-medium term, as most large corporates are now focused on optimising their resources with a twin-pronged approach of improved inventory planning,coupled with demand forecasting. This is expected to lead to a phenomenon, wherein, warehousing demand is expected to outpace supply.
Canada Pension Plan Investment Board’s (CPPIB’s) acquisition of a majority stake in IndoSpace, for about USD 500 million, marked the largest industrial and logistics deal in India. LOGOS Group and Assetz Property Group, earlier in the year announced a partnership to set up a logistics and warehousing platform that will invest around $400 million of equity capital to build and manage specialised logistics and industrial parks in India. Many e-commerce logistics businesses like Amazon, Delhivery and 4tigo Network Logistics secured an infusion of funds for their warehousing activities.
India has a student population of over 300 million and there are many Tier II and III cities that have become education hubs, including Pune, Hyderabad, Ahmedabad, Nagpur, Kota and Jaipur. The magnitude of students’ influx is high and Higher Educational Institutes are unable to provide sufficient accommodation options. This has in turn given a boost to rental housing markets in various cities.
With improved automation enabling a distributed workforce, emergence of the start-up economy and multiple travel options offering access to remote areas, community working, economical spaces as well as plug-and-play cubicles are the need of the hour and on-demand today. According to a study by JLL, the co-working segment (market size 12-16 million sqft) in India is expected to receive $400 million in investments by 2018. Subsequently, the segment is expected to grow by 40-50% in 2018.
In India’s top cities of Delhi NCR, Mumbai, Bangalore and Pune, a co-working space is likely to lead to cost savings in the range of 20-25% when compared with leasing a traditional office space. Planning for 2020, Mumbai and Bangalore offer by far the best opportunity for creating co-working spaces targeted at corporate firms seeking activity-based office space for focused talent groups.
Investment Outlook 2018