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Global investors shift to alternative assets; institutional investments in Indian real estate marks 16% jump since 2021
Global investors shift to alternative assets; institutional investments in Indian real estate marks 16% jump since 2021

April 24, 2024

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In recent years, across the Asia-Pacific markets, the real estate sector has been impacted by two significant factors - the COVID-19 pandemic and interest rate fluctuations. While COVID-19 is no longer classified as a global health emergency, changes in interest rates continue to influence the market’s trajectory.

An element of unpredictability, caused by global volatilities, looms over the real estate landscape. Owners and investors now prioritize reliable yields over relying solely on capital gains. Additionally, awareness around environmental, social, and governance (ESG) credentials is growing among investors and occupiers. Quantifying the positive impact of green practices on property values requires collaborative efforts from industry stakeholders. Regular valuation reviews can help manage portfolio risk in this uncertain environment.

India’s real estate investments have surged by 16% since 2021, driven by factors such as central banks implementing stricter monetary policies, sluggish growth in commercial real estate (CRE) across developed nations, and a shift by global investors toward alternative investment opportunities.

Bengaluru, India’s largest commercial real estate (CRE) market, has experienced an increase in both global and domestic investment. However, notable cap rate compression has not been evident. This lack of compression can be attributed to macroeconomic factors such as inflation, credit conditions, and interest rate policies, which play a role in asset valuation.

Over the next 12 months, Bengaluru is projected to experience robust growth and a modest increase in rents within the commercial real estate (CRE) sector. These positive trends are influenced by macroeconomic factors, leading to cap rates remaining relatively stable. While retail consumption growth is expected to level off, this will contribute to steadier net operating income (NOI) growth and potentially fewer transactions in the retail asset market. Meanwhile, industrial cap rates may see a slight compression due to heightened capital exposure and demand.

Looking at the Mumbai region, a notable surge in consumption demand was recorded post-pandemic. This growth was particularly evident in average trade densities, resulting in higher in-place rents for organized retail assets. These retail properties adopted a model that combined minimum rent with revenue sharing, leading to improved Net Operating Incomes (NOIs) and subsequently better valuations.

This hyper-growth was primarily confined to luxury and premium market segments, while the broader retail market, including high streets, did not experience the same benefits. Yields stabilized, maintenance capital expenditures increased, and gross rents remained flat, resulting in retail capitalization rates remaining range-bound over the past few years. Cap rates for retail and commercial real estate (CRE) assets are projected to remain steady due to capital allocations and trades showing no significant improvement from an institutional standpoint.

Continued growth in private consumption, business demand, and supportive policy measures led to strong investments in industrial assets, especially in warehousing and data centers. As a result, asset valuations improved due to cap rates compressing by 150–200 basis points compared to the situation in 2020. Industrial cap rates are anticipated to experience a slight compression owing to increased capital exposure, strong demand, and supportive incentive programs aimed at fostering growth in this segment.

By Ajay SharmaManaging Director, Valuation Services, Colliers India. 


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