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What is driving CPPIB and other foreign investors into Indian offices?

Significant capital flows into a challenging property sector in a historically challenging country is a sign the India story is gaining global momentum.


Has Indian real estate turned a corner?

Despite being one of countries most impacted by covid-19, India has stood out on the global real estate stage due to a string of large office transactions by marquee foreign investors throughout the pandemic. This week, Canada Pension Plan Investment Board said it would invest $210 million to develop 10.4 million square feet of commercial office space in partnership with Indian developer RMZ Corp.

Last month, another Canadian investor, Ivanhoé Cambridge, made its first direct office investment in India by setting up a $500 million platform with Bangalore-based Embassy Group to acquire and develop office business parks. Meanwhile, Blackstone is inching closer to completing its phased takeover of developer Prestige Estates’ commercial real estate portfolio, a deal reportedly valued at $1.2 billion. In total, as much as $6.7 billion has been invested by private equity investors in Indian real estate in the year ending 31 March, 2021, according to property consultant Anarock Capital.

None of these investors are newcomers in Indian real estate. But getting their global investment committees’ approvals to make meaningful equity commitments in a challenging property sector and historically challenging market during a volatile year speaks volumes.

There are several factors currently going in favor of the Indian office sector and the broader real estate market in the country.  As such, the pandemic’s impact on office demand is seen by industry observers only as a short-term blip. India has become a preferred global outsourcing destination for companies, given its low-cost knowledge talent. Much of the demand for office space is being driven by technology firms and leasing activity in some of the tech hubs has remained resilient in 2020. Resumption of business activities and improvement in sentiment with news of potential vaccines, ensured that office transaction volume for the top eight cities grew by a massive 271 percent quarter-on-quarter in Q4 2020, according to data published by Knight Frank. Bangalore – known as India’s Silicon Valley – led the office leasing activity last year, with gross absorption of 11.2 million square feet, according to data published by another property services firm Colliers.

The economics make sense, too. As one real estate investor pointed out to PERE, the cost of real estate in India in terms of average rents has remained mostly stagnant in dollar terms for global corporate tenants. And for long-term investors like Ivanhoé Cambridge and CPPIB, the risk-adjusted returns and so-called premium for investing in India is attractive. Chanakya Chakravarti, managing director for India at Ivanhoé Cambridge, told PERE recently how investors could get a 300 basis points spread for a build-to-core office investment in India, which might not be possible in any of the other major Asian economies.

The fundamentals of the real estate market should also be viewed in conjunction with developments on the policy and regulatory front. A series of regulations, along with a stringent financing environment, has forced many real estate developers to deleverage and consolidate.

This market dislocation has created a wave of portfolio and entity-level acquisition opportunities for private equity capital. For the 12-month period ending 31 March, 2021 there were $4 billion-worth of portfolio investments by private equity investors, compared with only $400 million a year before, according to Anarock Capital.

And lastly, the development of a successful REIT regime has created a viable exit avenue for private capital. Canadian alternatives giant Brookfield was the latest firm to have successfully listed its REIT in India in February and many others are in the pipeline.

Indian real estate is clearly back on the radar of global institutional capital. The next litmus test would be when it attracts direct commitments from new investors that have so far kept out of the country.

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