Equity investments in real estate grew by over 32 percent year-on-year in 2022 to $7.8 billion, reflecting the recovery of the sector in India. This was the highest annual investments recorded in the country to date, outpacing the 22 percent recorded in the pre-pandemic year of 2019, according to CBRE’s The Real Estate Outlook 2023 report.
CBRE is a real estate services company focused on commercial properties.
Equity investments in real estate refers to instances where people or institutions become shareholders in a property with ownership rights in proportion to the amount invested, as opposed to a real estate investment trust or REIT that pools money from investors in return for dividends sans ownership.
Equity flows into the sector will remain steady with expected investment at around $12-13 billion over the next two years and account for around 20-25 percent growth on a year-on-year basis. Office space would continue to garner a majority share of total institutional inflows, followed by the industrial and logistics (I&L) sector and land parcels. In addition, alternative investments, particularly in data centres, may take off, the report said.
The strong momentum seen in deal closures continued in 2022, with about 125 deals reported compared with 123 in 2021. The average deal size has also moved up to nearly $62 million in 2022 from about $48 million recorded in 2021, a strong growth of about 30 percent on-year. Midsized deals ($10-50 million) accounted for a major chunk (57 percent) of the total investments recorded in 2022, the note said.
In terms of favoured sectoral bets, the office sector received more than 56 percent of institutional investors' total assets of about $10 billion. Greenfield ventures received $2.5 billion in investment through the acquisition of sites/land parcels, accounting for roughly 15 percent of the total. Retail got over $2 billion in capital infusions, or more than 11 percent of total institutional investments.
“India’s strong underlying economic and demographic fundamentals, coupled with the evolving global trade landscape across sectors, builds a strong case for higher investments in real estate in 2023. The China+1 strategy being adopted by many global corporates to de-risk supply chain requirements and mitigate production challenges is expected to benefit India. This would lead India to capture an increased market share in the global supply chain over the next five to six years,” said Anshuman Magazine, chairman and CEO, India, Southeast Asia, Middle East and Africa, CBRE.
Residential and mixed-use land parcels drew capital flows of over $7 billion
There has been a recent rekindling of land acquisition appetite, with almost 6,800 acres of property having been acquired between the developer and investor category during 2018-22. In particular, the last two years saw a surge in activity, with approximately 60 percent of land being purchased just since January 2021, the note said.
Within this segment, the residential market has gained the most traction, accounting for over 37 percent of the land acquired since 2018. Residential and mixed-use land parcels accounted for roughly 60 percent of the overall investment flows in the acquisition of land. Collectively, these two sectors drew capital flows of over $7 billion, which is anticipated to result in a robust supply in the upcoming years.
In the next two years, metros and tier-1 cities are likely to continue to be the major recipients of equity inflows. The growth in real estate development activity supported by strong demand in the retail and I&L sectors could result in an increased level of investment in tier-I and select tier-II cities. Industrial and warehousing (I&W) was responsible for one-fourth of land purchases between 2018 and 2022 due to an evolving ecosystem, shorter construction timelines and limited supply of completed investment-grade warehouses, the note said.
Mumbai leads the investments in onsite facilities followed by Delhi and Bengaluru, while the Delhi region leads with 26 percent of acquisition of undeveloped land. Mumbai and Hyderabad both recorded 14 percent share each of land acquisitions, the note said.
The gateway cities
Delhi followed by Mumbai and Bengaluru dominated overall investments in 2022, accounting for over 67 percent of the total outlay. In terms of annual growth, too, Delhi reported a strong increase of 83 percent, followed by Bengaluru (76 percent) and Mumbai (27 percent).
Mumbai followed by Delhi and Bengaluru dominated cumulative investments, accounting for over around 63 percent share since 2018. This translates to about $20 billion worth of equity capital deployed across these cities. The total investment during 2018-2022 was $32 billion.
Owing to predominant concentration of completed or under-construction investible grade projects in these cities, over 300 deals were reported since 2018, which translates to over 57 percent share in the total deal activity.
Office sector attracts investments worth nearly $13 bn
Long-term (2018-22) data analysis revealed that the office sector remained the mainstay of investors, particularly foreign institutional investors. Investing in alternative solutions, specifically in data centres, could also gain further traction. As a result, this sector has attracted investments worth nearly $13 billion, accounting for over 40 percent of the total inflows in the 2018-22 period. This was closely followed by over $12 billion deployed in the acquisition of sites/land parcels, fetching about 39 percent share in cumulative investments.
Institutional investors have consistently been the major source of capital deployment in Indian real estate, followed by property companies. A similar trend prevailed during 2018-22 as well, when institutional investors accounted for $15.7 billion and property companies accounted $10.4 billion of the cumulative investment flows.
While investments in the office sector continues to be predominantly concentrated in metros/tier-I cities, the retail, I&W and site/land parcels segments have seen investment flows beyond these cities to tier-II and tier-III cities as well in the recent past. Due to an increase in real estate development activity, especially in the retail and I&L sectors, tier-II cities could see increased investment levels in the coming years. However, the major beneficiaries of the equity inflows will continue to be metros and tier-I cities during this period.
On a cumulative basis, foreign investors, primarily based out of North America and Singapore, have driven the investment flows since 2018. They have cumulatively deployed in excess of $18 billion, accounting for about 58 percent share in total investments. On the other hand, domestic investors (primarily real estate developers) have cumulatively pumped in over $13 billion for about 42 percent share in total investments since 2018, the report said.
More than $10 billion have been invested by the top three Indian investors, accounting for 60 percent of all institutional investments made during this time, it added.
Equity investments include those by private equity funds, pension funds, sovereign wealth funds, institutional investors, real estate developers, real estate fund-cum-developers, investment banks, corporate groups and REITs.