Roundtable: India’s real estate market is stable and scalable

This article is sponsored by CapitaLand Investment India, HDFC Capital Advisors, Ivanhoé Cambridge, and Logicap Management

India’s economy has been on a roll for the past decade, with persistent GDP growth, a wave of infrastructure investment and a platform of economic reform. The nation’s main stock index has grown almost fourfold in a decade and its real estate market has suffered less post-pandemic upheaval than many. This is not news to the market participants taking part in PERE’s India roundtable, all of whom are India real estate veterans. They observe that more investors from all over the world are looking to get in on the action.

India experienced its first wave of overseas real estate investment between 2005 and the global financial crisis. The endeavor was unsuccessful for some investors, meaning India fell off the radar for many during the next few years. However, after Narendra Modi was elected prime minister in 2014, India embarked on twin programs of economic reform and infrastructure investment, both of which significantly changed the economic outlook for the nation.

“Our own experience in India shows how the market has been developing,” says Sanjeev Dasgupta, chief executive of Singapore-based manager CapitaLand Investment India and chief executive of CapitaLand India Trust. “As of this year, we have been in India for 30 years. However, assets under management have tripled in the past nine years, which is a pretty good reflection of the stable economic and regulatory environment for foreign investors in particular.”

A flurry of regulatory reforms in 2016 set the stage for growth. The real estate industry was specifically targeted for reform through the Real Estate Regulatory Act 2016 (RERA), which aimed to protect homebuyers and promote real estate investment. The industry also benefited from the imposition of a goods and services tax which replaced a host of state taxes and enabled interstate trade, which also kickstarted the modern logistics sector.

A formalized insolvency and bankruptcy framework was also introduced, and there was demonetization, which saw the withdrawal of certain banknotes in an attempt to combat tax evasion and the black market.

“Many fund managers have made very good returns from capital allocations to India in the last eight to nine years and I think that is one of the reasons they are viewing the opportunity differently”

Sanjeev Dasgupta,
CapitaLand Investment India

These measures “had operational challenges at the time of implementation, but brought in a lot of changes over the past three to five years,” says Vipul Roongta, CEO of HDFC Capital Advisors, a real estate investment management subsidiary of India’s largest private sector bank. “From a buyer’s perspective, today in India, RERA regulates each project, and you can be assured that the developer will complete the project, which was not the case previously. The market has also consolidated and become more mature, more professional.”

Priyank Shah, head of fund management and strategic business development at Singapore-based manager Logicap Management, says: “The whole system in India has gone through a cleansing process with RERA and other regulatory changes which have helped to institutionalize the Indian real assets market.”

The other arrow of Modi’s policy was infrastructure. Pallavi Bhargava, senior director, investment and asset management, APAC at Canadian investor and developer Ivanhoé Cambridge, says: “In India, for the first time, infrastructure is driving development. Over the past 10 years, national highways have grown by 60 percent, and we have witnessed growth across ports, airports and other areas. It is not just the development of physical infrastructure, but digital too.”

Bhargava cites digital innovations such as the United Payments Interface, an instant payment system, and Aadhaar, a digital identity code that helps people access government programs. These have “formalized and democratized Indian commerce, laying the base for incremental and inclusive growth,” she says.

Roongta describes India’s infrastructure works as a “once-in-a-lifetime program. The nation’s electrified railways increased from 2,500 miles in 2014 to 17,500 miles in 2023, and the number of airports doubled to 148. Transport infrastructure has brought urban areas closer together, he adds. “This has brought the Tier 2, 3, 4 cities closer to Tier 1, thus creating urban conglomerates.” These urbanizations will be major focuses for real estate investment in the coming years.

With Modi the favorite to win this year’s Indian election, these reforms are set to continue. Dasgupta says: “It looks like the incumbent government has a high probability of being re-elected, which is expected to continue what is, by and large, a stable economic policy environment.”

Sustainable initiatives boost Indian real estate

New stock is becoming greener

Indian asset owners and tenants are beginning to align on sustainability, with new office developments leading the way. 

Pallavi Bhargava at Ivanhoé Cambridge says: “All stakeholders – government, investors, developers and tenants – seem to be aligned on ESG.”

Between 2020 and 2023 the number of offices gaining green certification rose 60 percent, and overall India ranks third in the LEED certification globally. “As India is going to see a lot of new stock the percentage of green buildings is likely to increase further,” Bhargava adds.

An important reason for the growth of greener buildings is cost, says Priyank Shah of Logicap Management. “The cost of sustainable solutions in India is a fraction of what you would spend in mature markets, which is encouraging more sustainable development – a trend we see gaining momentum.”

Renewable energy is a major focus for the Indian government and India is growing its renewable energy capacity at a tremendous pace. Real estate is also getting involved, says Sanjeev Dasgupta of CapitaLand Investment India, which recently built a solar power plant in the state of Tamil Nadu. “We’re increasingly finding tenants are keen to know whether the power we source for them is green or not.”

He also predicts renewable energy will be a boost to the data center sector in India. “Many other countries around the world are struggling with data center expansion because of the environmental impact, but India could actually have data centers significantly powered by clean energy.”

Investor interest

India is one of very few global real estate markets to be largely unruffled by the hikes in interest rates over 2022 and 2023. Interest rates did rise in India, but from a higher base, making the effect on the market outlook far less dramatic – rates rose from 4 percent to 6.5 percent. Indeed, MSCI data shows Indian commercial real estate transaction volume rose 10 percent year-on-year to $4.4 billion in 2023.

Bhargava says: “The rise in Indian interest rates has had a lesser effect on values – cap rates have expanded but not at the same rate – because the increase in interest rates on a percentage basis is lower in India and margins on financing have reduced. Banks are well capitalized, the fundamentals are strong. India is not a leveraged play, unlike many developed markets.”

Shah adds: “We have seen some expansion in cap rates, but if you look at the cap rate on prime assets, then it is not more than 50 basis points because demand is still strong for that product and supply is minimal. On a replacement cost basis, it makes sense to buy that income because land prices and construction costs have both appreciated significantly.”

However, the global interest rate environment has impacted foreign investment in Indian real estate. Global investors have become more focused on dealing with problems in their portfolios in other markets, while opportunistic players are seeking out market dislocation.

“There is no other emerging market which offers the same scale as India”

Pallavi Bhargava,
Ivanhoé Cambridge

Dasgupta says: “Rate hikes in the US are creating interesting opportunities in the US: special situations, distressed opportunities, structured credit opportunities, for example, which are taking capital away from emerging markets.”

Indeed, PERE data shows capital raised for private real estate funds with a sole or partial focus on India fell last year, from $7 billion in 2022 to $4.3 billion. However, the 2023 total is higher than pre-pandemic levels. In addition, there are several large funds in the market that are expected to allocate to India, the largest being Blackstone’s Real Estate Asia Partners III, which is targeting a capital raise of $9 billion.

Roundtable participants have observed more investors turning their attention to India recently. Bhargava  says: “Pension funds and global institutions have been very cautious about deploying capital in the current environment. However, India is standing out in Asia-Pacific. Some of this reflects capital being allocated to alternative markets to China, but it is also a reflection of India’s growth. Ivanhoé Cambridge has increased its allocation over the past two years.”

Shah adds: “We’ve seen many new investors looking at opportunities in India. This is a stark contrast from the prior seven or eight years. We have seen Japanese corporations interested in the market, while private equity groups who may have missed out, or [had] prior poor experiences in 2005-07, are coming back.”

Dasgupta notes that many sovereigns and pension funds, including investors from Canada, Singapore and Korea, have set up offices in India or have plans to do so. “That tells us the seriousness of their capital allocation intentions,” he says.

Alongside support from regulatory reform and investment in the country’s infrastructure, the sheer scale of India is attracting investors, the roundtable hears. The country has a population of 1.4 billion and half are under 25 years old, providing potential for significant growth and an opportunity for investors to scale their portfolios.

HDFC’s Roongta suggests this scale is making foreign investors think differently about India. He says: “I think we are seeing a change from foreign investors who appreciate the scale India can offer. Previously they were focused on getting a certain internal rate of return to account for the extra risk. Now, in addition to IRR, large global investors are allocating large sums of capital, to the tune of more than a billion dollars, for a particular strategy. Investors are thinking more about the medium to long term than short term.”

Additionally, Dasgupta points out: “Many fund managers have made very good returns from capital allocations to India in the last eight to nine years and I think that is one of the reasons they are viewing the opportunity differently.”

After some unsuccessful partnerships with local firms in the pre-GFC period, large global investors have tended to set up their own platforms or invest directly. However, Shah suggests this is changing as more credible local players have emerged. “I feel we’re coming to the end of that cycle where LPs were trying to do more direct investments or have more control. Passive capital wants to back credible groups. Depending on the asset class, it is clear who are the credible teams given their track records,” he says.

“The whole system in India has gone through a cleansing process with RERA and other regulatory changes which have helped to institutionalize the Indian real assets market”

Priyank Shah,
Logicap Management

Nonetheless, the Indian market still requires a lot of hard work, says Bhargava. “Investing in India takes time – to become comfortable with the market and also with selecting operating partners, which is very critical.”

A further barrier to entry is rising land prices, due to land being acquired for infrastructure projects and rapid urbanization, says Roongta. Land ownership is often fragmented, and aggregating plots for development can be a lengthy and difficult process. Like many markets, India has seen substantial construction cost inflation, which Roongta says amounts to hikes of 40-50 percent over the past five years.

Office is attractive

A considerable chunk of foreign investment in India in the past decade has been in the office sector, which – unlike in many other global markets – remains attractive post-pandemic. Savills data shows office take-up in the six largest Indian cities rose 12 percent to 62.3 million square feet in 2023. Office utilization is back up to 60 percent and most occupiers are asking staff to work at least three days in the office, while banks insist on five.

“The interesting thing is that although they’re asking their employees to come back on fewer days, it’s not reducing the requirement for space,” says Dasgupta. “Tenants tell us they are not pushing people to work from the office for more days of the week because they don’t have enough real estate. In 2022, in particular, most of the IT companies hired very large numbers so they don’t really have the space to have all employees in the office all the time.”

Another differential in the Indian office market is the growth of flexible space operators, which accounted for 17.2 percent of total take-up in 2023, Savills data shows. Shah explains: “Tenants in India are paying probably one-tenth of what they’re paying in their mature markets in real estate costs, but the hassle of admin facility management is the same. Consequently, these tenants are prepared to pay a flex space manager to take away that friction. Our flex space business saw 40 percent EBITDA growth last year and has been able to attract top-tier tenants like Microsoft, Google and Tesla.”

Offices have been insulated from rising land prices, Dasgupta says, because the sector is mainly in business parks, where plot ratios have been increasing and offsetting rising land prices.

Logistics has also been a key sector for foreign investors. But with only 380 million square feet of modern space, development is the only way to build scale and “there’s only a handful of managers who have done this successfully,” says Shah. “Development costs have gone up and land acquisitions are becoming super challenging. As a result, I think we’re hitting that cycle where new development supply slows down, because it looks less attractive from a risk-adjusted development return perspective. However, if you can keep developing, then you are in a good position.”

Bhargava says logistics remains a high-conviction sector for Ivanhoé Cambridge: “Logistics is part of the infrastructure, the backbone to the economy. We see three sectors which will drive warehousing growth: manufacturing, e-commerce and the growth of retail.”

“I think we are seeing a change from foreign investors who appreciate the scale India can offer”

Vipul Roongta,
HDFC Capital Advisors

The Indian government plans to increase manufacturing from 17 percent of GDP in 2023 to 25 percent by 2030, with support for manufacturing auto components, semiconductors, renewable energy and electric vehicles both for the domestic market and exports.

The largest property sector in India is residential. It has been booming, even with rocketing land and construction prices, says Roongta, whose company specializes in residential. “The Indian stock market has risen strongly, so there is a general feeling of rising wealth. Today, even though the rates have inched higher to 8-9 percent, the sales prices have also increased, by at least 50 percent. Demand is strong and buyers are not overleveraged, so the buying momentum is expected to continue in the short to medium term,” he says.

With inequality a persistent problem in India as it is in many other markets, this also creates an investment opportunity. The government plans to create 20 million homes for the lower-middle classes and 20 million homes for the poorest people in society, Roongta says. “This is probably one of the world’s largest-ever urban social housing schemes for the lower and middle classes and will completely transform the urban landscape in India.”

Other sectors of interest to investors include data centers, where the market is being driven by “exponential growth in cloud computing and also the data localization laws in India,” says Dasgupta. Shopping centers, which are relatively rare in India due to a historic preponderance of ‘mom and pop’ retail, are also thriving, he says, with occupancy rates above 90 percent. “The post-covid recovery for consumption has been really strong, which means an exciting outlook for retail real estate in the country.”

REIT deal demonstrates strength of local capital

Blackstone sold its stake in Embassy Office Parks REIT
to mostly domestic investors

Domestic institutional investors are becoming bigger players in Indian real estate, both in private real estate and the nation’s real estate investment trust sector.

One of the standout transactions last year was Blackstone selling its remaining stake in the Embassy Office Parks REIT for a reported $853.5 million. The US investment manager, which put together the REIT’s portfolio with India’s Embassy Group, is understood to have sold its units to a number of mainly domestic investors. 

Priyank Shah, head of fund management and strategic business development at Logicap Management, says: “This scale of domestic liquidity was previously not present but has come up in the past two or three years.”

He also notes that domestic investors focused on Indian rupee returns are more content with lower returns than foreign investors which need to consider currency risk. 

Pallavi Bhargava of Ivanhoé Cambridge adds: “The introduction of REITs has increased the liquidity options for investors in India.”

So far, India has four listed REITs, but more could be on the way. The Securities and Exchange Board of India is planning to introduce small and medium-sized REITs for smaller portfolios. 

New capital incoming

Sentiment among the roundtable participants is positive, but they also sound a few notes of caution. The nation’s political stability is a plus, especially in the current geopolitical environment, but investors should not be complacent, says Roongta. “While India has remained stable and is largely driven by domestic consumption, there could be external factors outside of its control impacting the macroeconomic situation. This I believe is something that cannot be totally ruled out and should be watched out for.”

Shah adds: “Despite what we have said about the cleansing and stabilizing of the market, governance remains a concern. There are a few players who are institutional but, as new capital starts coming in, there will be an emergence of newer, unproven managers. The influx of new capital will surely see some unfocused commitments. That said, I think investors are getting smarter in the way they choose their local partners with governance being an important element to pay attention to.”

Nonetheless, the combination of scale and stability is something few markets can replicate, says Bhargava. “When you think that India GDP is set to grow from $3.7 trillion to $5 trillion in the next few years and India is predicted to be the third-largest economy by 2027, we will see growth across any business that you pick. There is no other emerging market which offers the same scale as India.”

Meet the roundtable

Sanjeev Dasgupta
CapitaLand Investment India

Dasgupta is chief executive of CapitaLand Investment India and CEO of CapitaLand India Trust. CLI has total assets under management of $100 billion, and $4 billion in India. Dasgupta has been with CapitaLand and its precursor businesses for a decade and previously held roles with ICICI and Future Capital Holdings.

Vipul Roongta
HDFC Capital Advisors

Roongta is the CEO of HDFC Capital Advisors, a subsidiary of India’s largest private sector bank, which manages a $4.5 billion private equity fund, investing in Indian real estate. He has been with the HDFC Group for more than 20 years.

Pallavi Bhargava
Ivanhoé Cambridge

Bhargava is senior director, investment and asset management, APAC at Canadian investor and developer Ivanhoé Cambridge, which has C$77 billion ($57 billion; €52 billion) in global AUM and C$7.9 billion in APAC as of December 2023. Bhargava joined just over two years ago from Hong Kong-based ESR and previously held senior roles at LGT Capital Partners and Composition Capital Partners.

Priyank Shah
Logicap Management

Shah is head of fund management and strategic business development at Logicap Management, a fund management entity of Rava Partners, the real assets strategy started by Rava Partners senior management together with Hillhouse in 2020. Shah joined Logicap in 2023 after nearly 13 years at JLL.