Institutional investments in the real estate sector in India over the last decade, are estimated to touch USD 5.5 billion in 2018, which is the highest ever since 2009. As of October 31, 2018, the sector has recorded investments worth USD 4.2 billion, according to a report titled ‘Institutional Flow of Funds to Indian Real Estate: Trends and Progress’, by JLL. The report also highlights that institutional investments in 2014-2018 doubled to USD 20.3 billion, compared to USD 9.4 billion received during 2009-2013.
Driving the growth in investments, are factors like the implementation of transformative policy reforms, stable macro-economic fundamentals and growing risk appetite of foreign and domestic institutional investors. According to the report, the Indian real estate sector has attracted nearly USD 30 billion of institutional investments, from January 2009 till October 2018.
Key highlights of the report
- Investments more than double to USD 20.3 billion in 2014-18 from USD 9.4 billion in 2009-13.
- The commercial office segment was the top pick of investors.
- Outstanding credit by non-banking financial institutions (NBFIs) tripled to USD 40.2 billion in FY2017-18 from USD 13.4 billion in FY2011-12, with NBFIs currently facing liquidity pressure.
According to Ramesh Nair, CEO and country head, JLL India, “India’s real estate sector is at an inflection point. While the investment scenario improved after the global financial crisis, there has been a surge in institutional investments into the sector, since the beginning of the year 2014. The trend suggests that the market offers tremendous growth opportunities to foreign and domestic investors. Against the backdrop of an ongoing policy overhaul, rising investor confidence, enhanced transparency, gradual recovery in the residential segment and an increasing demand for grade A commercial office space, the investment momentum is only expected to grow manifold from its current levels.”
Institutional investors’ preferred segments and cities
In terms of cities, Mumbai, Delhi NCR and Bengaluru have been the preferred markets, accounting for over two-thirds of the institutional investments from 2009 till 2018. With 42 per cent share of investments worth USD 8.6 billion in 2014-18, Mumbai is clearly ahead of the other cities. It is followed by Delhi NCR and Bengaluru with USD 4.4 billion and USD 2.6 billion, respectively. Among different types of institutional investors, the report states that private equity investors have contributed 80 per cent or more of the overall institutional investments in the last decade.
The report shows the commercial office segment emerging as the most favourable asset class for institutional investors, with a five-fold increase in capital flows to USD 8.2 billion in 2014-18 from USD 1.6 billion in the preceding five-year period starting 2009. With non-IT/ITeS companies emerging as demand drivers, the share of institutional investments in non-IT office space has jumped manifold, ranging between 70-85 per cent during 2016-18, as compared to 20 per cent in 2009.
“One of the major drivers for the growing interest of investors in the commercial office space, has been the government’s move to bring in progressive modifications in India’s REIT (real estate investment trust) policy in the last three years, making it more market friendly. As a result, global investors have invested significant capital in acquiring large office assets, for building their REIT portfolios in India. In particular, 2017 and 2018 recorded maximum investments of USD 5.9 billion in the office space segment. This amounts to 72 per cent of the total investments in the commercial office segment during 2014 to 2018,” said Samantak Das, chief economist and head of research and REIS, JLL India.
Besides the commercial office segment, retail is another asset class that has also witnessed a sharp rise in investments. From just USD 134 million during 2009-13, investments in retail surged by eleven times, to USD 1.6 billion between 2014 and 2018.
Lending by non-banking financial institutions (NBFIs)
With lending by banks to the real estate sector slowing down since FY2011-12, the report focuses on the role being played by NBFIs (including non-banking financial companies and housing finance companies), in terms of outstanding credit to realty companies. From USD 13.4 billion in FY2011-12, the outstanding credit has tripled to USD 40.2 billion in FY2017-18. This translates to a CAGR of 20 per cent. In percentage terms, the proportion of financing by NBFIs has increased to 58 per cent in FY2017-18 from 36 per cent in FY2011-12.
As far as NBFCs are concerned, developers have preferred to refinance existing loans, to reduce interest costs. During FY2017 and FY2018, an estimated USD 14.4 billion was disbursed by NBFCs to the real estate sector. On the recent liquidity crisis being faced by NBFCs, the report notes that although it is not a systemic risk, the real estate sector will face funding issues in the short-term. However, NBFCs affiliated to large corporate groups have steady asset quality and are likely to honour their short-term liabilities.
Interesting trends that will gain prominence in the next few years, include the emergence of platform deals, with increased focus on affordable housing, retail, industrial and warehousing sectors.