“The rebound in the office sector with a return-to-office and renewed leasing led to improved investment sentiments as reflected in USD 652 million capital flow during Q2 2022. There was a preference for core assets indicating an inclination for operational rent-yielding assets. We are also seeing Grade A developers attracting more and more entity-level investments. Entity-level investments by offshore funds with one of the leading developers accounted for an 11% share of deal volume in Q2. In light of current macroeconomic factors and limited availability of institutional grade core assets in the market for sale, we expect this trend to continue.Data centres and warehousing remain sectors to watch out for as we are expecting to see multiple land/portfolio acquisitions acquisitions and strategic partnerships in the coming quarters,” said Lata Pillai, Head of Capital Market, India.
Office sector accounts for 67% share in Q2 2022 at USD 652 million
NCR-Delhi accounted for the highest share due to two large deals. Another portfolio deal consisting of assets in NCR-Delhi and Chennai accounted for 34% share. The increasing trend of portfolio-level investments compared to individual assets has led to an aggregation of assets across cities. Institutional investors are also investing in the parent holding companies thereby achieving diversification across regions and assets.
Institutional investments in Indian real estate declined by 27 % during H1 2022 on a Y-o-Y basis. The expected growth in investments in 2022 was impacted due to global headwinds caused by the geopolitical situation. The year 2021 witnessed a revival in investments leading to the first half of 2021 registering investments of USD 2,630 million. However, the ebbing of the pandemic coincided with the start of the geopolitical crisis in 2022 and impacted stability and growth globally. Indian real estate registered sustained recovery despite the uncertain economic environment. However, the momentum in investments was slower in response to the uncertainty leading to USD 1,909 million during h1 2022
H1 2022 investments near 73% of previous period volume
Though the institutional investments in Indian real estate grew at a slower pace, the credit flows from the banking sector witnessed sharp growth during the last three and half years.
“The near standstill in the real estate segment during the pandemic was reflected in the sharp decline in net credit disbursal from USD 4 billion in 2019 to USD 1.5 billion in 2020. Construction finance dried up sharply as the project construction was stalled due to the pandemic conditions. However, the situation reversed in 2021 with a gradual return to normalcy,”
“Banking sector credit to the real estate sector witnessed 3.5x growth during 2021 as compared to the pandemic period due to the low-interest rates regime and relaxed lending norms. Residential real estate witnessed robust recovery post the waning of the pandemic. This improved cash flow positions of developers due to brisk home sales. The office sector witnessed 26 mn sq ft of net absorption in 2021 revving up the growth cycle. The improved balance sheets helped developers to access credit from the banking sector at low lending rates. This has been reflected in 3.5x growth in net credit disbursals. The first five months of 2022 continued the growth momentum with a net credit disbursal of USD 4.0 billion which is 75% of the total disbursals in 2021. Developers are expected to benefit from the lower lending rates over the next few months only, as the lending rates will increase in line with interest rates. The increase in policy rates and consequent rise in lending cost is likely to result in developers turning to institutional investors for equity/asset divestment.
The Indian economy was also impacted by the global headwinds. However, the inherent strength of the economy has helped to maintain the growth momentum. Indian real estate continued to witness growth across segments during H1 2022 and is likely to maintain the trend. Investors are expected to remain optimistic about the emerging real estate scenario and commit more capital across asset classes. While office assets would be the preferred choice, the residential segment is expected to see more investor interest. Warehousing and
Data Centres are expected to see competitive cap rates on the back of increased investor interest. Another asset that is slowly piquing investor interest is Life sciences. With more and more developers looking at the prospect of developing life science assets and conducive macroeconomic factors in place, we expect this sector to start seeing more activity soon.
Credit: JLL
25th July 2022 Ravindra Yadav