With the general elections now behind us and with the likelihood that the current policies continue, India will retain its tag as the fastest growing economy in the world and soon become the third largest economy with about USD 7 trillion GDP by 2030. What is notable is that India’s recent growth surge has come during the time of several headwinds: geopolitical conflicts, supply disruptions, commodity price spikes, a hostile trade environment, and aggressive interest rate hikes by the Fed. India’s macro fundamentals, faster than expected GDP growth, has significant positive ramifications on real-asset returns, especially the commercial real-assets, given the nature of India’s GDP having high contribution from the service sector.
Opportunities in commercial real estate market in India
In the recent quarters, the commercial real-estate market has seen a marked improvement in absorption due to significant growth in Global Capability Centers (GCCs) and demand coming from domestic customers. Unlike some global markets that may be concentrated in a few major cities, India’s diverse geography provides a multitude of options for businesses seeking strategic locations. One of India’s standout features is its cost-effective real estate options as compared to global hubs like London, New York, or Tokyo. Office spaces in Indian cities often come at a fraction of the cost and this cost advantage is a game-changer for companies looking to establish or expand their operations.
In terms of flows, investment appetite for foreign investors is expected to rise further given marked resilience of the INR versus other currencies and a structural reduction in risk premium for Indian assets. Quality commercial real-estate sector offers about 8-10% rental yields and the influx of global companies into India and growing domestic demand are expected to boost rental yields further. In 2023, the commercial office market ended on a strong note, laying the groundwork for a new upswing that will redefine the property market landscape over the next 2-3 years. India has seen a significant rise in Foreign Direct Investment (FDI), particularly in the real estate sector, enhancing the market’s liquidity and development.
Another factor for growth in FY 2025 is investments in digital innovation across the world will kickstart the virtuous circle of new projects, job creation and productivity, thereby immensely benefiting the IT/ITeS industry in India. Indian IT industry has defied the trend of layoffs and proved its ability to cushion high magnitude economic meltdown once again. India’s technology industry revenue growth has been 3X i.e. $245 Billion since 2010 and projected growth till 2030 is $500 Billion. The IT Industry is expected to be at the forefront of office space market given India’s young and dynamic workforce at significantly lower salaries.
Rise of GCCs in India
India has experienced a rapid rise of GCCs over the past few years. GCCs today account for about 60% of total office absorption and are the most important driver behind the spike in absorption rate in the recent past. Beyond just cheap labor, India’s talent pool and favorable policies are attracting numerous multinational companies to set up shop here. Currently, there are close to 1,600 GCCs in the country, with a workforce of over 1.6 million employees. These centers handle complex tasks including artificial intelligence, R&D, advanced analytics, and cybersecurity, in addition to traditional accounting, back-office operations, and related tasks. Ernst & Young (EY) projects that by 2030, there will be about 2,400 operational GCCs in India, with an average of over 100 new facilities added per year. Demand for office market will continue to improve with GCCs and Indian firms continuing to anchor growth.
Outlook
The real estate investment landscape is evolving significantly, especially in the commercial real estate sector, driven by factors like a robust economy, improved regulations, and new investment avenues. India’s real estate market is likely to “witness increased activity” in 2024 due to high demand and a positive business environment.
Commercial Real Estate is projected to grow at an annual rate of 21.1% in India, reaching USD 87.57 billion by 2028, is gaining popularity over residential options. Reasons include higher returns, with commercial rental yields ranging from 8-10%, outperforming the 1.5-3.5% range for homes. According to a report published by Colliers, Foreign inflows comprised 77 per cent of the total institutional investment in Indian real estate between 2019 and 2023, which shows continued confidence in the sector.
The United States and Canada are the top sources of capital in Indian real estate and there is growing interest from Asia-Pacific (APAC) countries Singapore, Hong Kong, South Korea, and Japan. Inflows from APAC into Indian real estate doubled to $1.8 billion in 2023 from $0.9 billion in 2019, according to data published by Colliers in their report. In 2023, inflows from the region were 57 per cent higher than $1.1 billion in 2022.
Investing in India’s commercial real estate market now allows investors to capitalize on these favorable conditions and benefit from the country’s ongoing economic and infrastructural transformation. Reduction in liquidity premium, formalization, ease of doing business and improved regulatory framework should further help to reduce investor risk perception of commercial real assets in India.