Institutional investors bullish on commercial real estate

India's commercial real estate market is segmented across Offices, Retail, Industrial and Logistics, and Hospitality. According to a media research report, the commercial real estate market in India is expected to grow at a CAGR of approximately 13% during the forecast period FY 2022-2027. The short-term impact due to Covid pandemic-led remote work trend is waning with the reopening of campus, back to office, higher retail footfalls, economic activities resumed, pent-up demand for travel explorations etc. Demand for grade A asset has sharply increased post Covid in the commercial realty markets with hygiene and social distancing taking the centre stage. It is estimated that by FY 22, the absorption of Grade-A office space will exceed 700 million sq. ft in major metro cities.

The demand from various sectors like Manufacturing, SMEs, Electronics, Auto ancillaries, E-commerce, 3PL, and Retail is bolstered on the back of Atmanirbhar Bharat mission. Revolutionary schemes like Make in India and policy reforms like GST, RERA, and IBC launched by the Government of India have augured well for strengthening the commercial real estate sector in India. It continues to attract the highest Foreign Direct Investments on the grounds of transparency, tax incentives, and competence of the sector. The large-scale investment by institutional investors is projected to fuel the accelerated growth of commercial realty.

The positive economic growth rally fostered by robust infrastructure development will boost demand for commercial real estate. Developers are optimistic about a healthy rebound in office leasing activity with the rise in investors' confidence due to swift economic resiliency. Increased transaction volumes signify strong consumer demand and higher occupancy levels. The modified office design concepts to befit new models like flex workspaces, co-living, student housing, and built-to-suit will be the future growth levers.

Commercial real estate continues to offer better rental yields on the ground's rapid urbanization and better job prospects. It is high in demand due to its recurrent earning potential with a high ROI of 6 to 10% yield on investment and capital returns. This is a highly location-centric sector driven by potential demographics and socioeconomic factors.

Periodic global economic discords recently have nudged investors to assess the risk variance of investment assets in portfolio return analysis. The idea of a capital market approach toward real estate investment is picking up amongst portfolio management experts. The technique is to determine the time value of money, valuation of cash flows, and risk hedged against return forecast. The performance of newly-launched investment instruments REITs and InviTs is yet to be benchmarked. With a strong presence of commercial realty market in India, REITs stand to gain significantly as viable investment options. The share of REITs in overall market capitalization is substantial globally, where Indian REITs are yet to catch up.

The Indian commercial real estate market is highly competitive. It is becoming a preferred destination for global institutional investors, driven by robust office space absorption, declining vacancy levels, and rising rentals. The sector is also witnessing a market consolidation trend post Covid as the need for capital funding increases multifold.

However, despite all the ambiguity around the future of offices in the wake of the pandemic, office assets continue to hold strong investment prospects, as evidenced by the quantum of investment committed towards the sector in FY 2022. The commercial real estate market has matured along with the evolved corporate finance landscape in India.

(By Dr Niranjan Hiranandani, CMD – Hiranandani Group, and National Vice Chairman – NAREDCO National)