The Global Pull of India's Commercial Real Estate

What will India look like in 2050? 

It will be the world's most populated nation, projected by the United Nations to overtake China around 2027. Based on nominal GDP and purchasing power parity (PPP), numerous public and private sources also believe India will boost the world's second-largest economy by 2050, trailing only China and leapfrogging the United States in the process. It will also vie with China as home to the world's largest middle class, with higher disposable income and greater consumption power. 

Investment-wise, the prospects will be perennially attractive for the foreseeable future. Foreign investment has been impressive since restrictions were lifted 2005. Nowadays, India attracts approximately of $60-65 bn in FDI each year.

Given all these factors, is it little wonder that commercial real estate investors are taking a longer-term view on India than in previous cycles? In short, no.

India's commercial real estate sector is now a legitimate asset class in the eyes of global investors. And with supportive demographics and business-friendly reforms becoming more visible, the pull of this asset class will remain active for the foreseeable future. 

FDI deployment into India has potential to become a broader real estate story in the coming years. For example, the total real estate stock in the market is extremely appealing and in need of ongoing investment to meet demographic and economic shifts. Nationwide, total Grade A commercial stock stands at. 612 mn sq ft, with Bangalore being the largest market with 138 mn sq. ft. Significantly, Bangalore has experienced 57 mn sq. ft. of net absorption in the last five years, the equivalent of Shanghai, Beijing and Hong Kong combined.

It’s little surprise then that since 2010, investors have flocked to India's commercial real estate space. According to JLL estimates, investment in India's commercial real estate market expanded more than fivefold in the decade ending 2019, hitting US$5.5 billion in 2019, with more than US$36 billion invested in the past 10 years.

A major spike in investors' appetite can be linked directly to more recent developments: supportive demographic shifts in India's cities and a host new and expected governmental reforms.

Banking on Cities

Like China, the fabric of India's society is transitioning from a predominantly rural base to a larger urban population. As a result of mass migration and the development of maturing economy consisting of consumption, services, technology, and e-commerce, India's fastest-growing cities have been drawing significant levels of interest from overseas investors looking to take advantage of present and longer-term economic fundamentals. 

At the start of 2020, numerous cities have emerged as favourite destinations for global investors. Judging by activity in the last decade, international investment centred around three primary urban clusters. Unsurprisingly, Delhi, the national capital, Mumbai, the financial capital, and Bengaluru (Bangalore), the IT capital, have been the primary recipients of investments. The three metropolises combined for two-thirds of real estate investments over the past decade.

Looking forward, investors will clearly look further when deploying capital into India's commercial real estate market. JLL's City Momentum Index 2020, which identifies the world's most dynamic cities from a real estate perspective, is led by two Indian cities: Hyderabad and Bengaluru. Another five Indian cities make the Top 20 – Chennai (5th), Delhi (6th), Pune (12th), Kolkata (16th), and Mumbai (20th). 

Looking at specific investment activity up to 2019 puts the rise of India's cities in further context. Blackstone Group had invested US$6.6 billion in Indian real estate by September 2019, according to local media. Brookfield and Canada Pension Plan Investment Board have also been prominent. Interestingly, foreign investment has been dominated by larger investors, who have made a long-term commitment to India, which could suggest that other investor profiles could potentially be weighing up options for near-term deployments.

Riding on Reforms

It's hard to argue that India's economy and demographics have been attractive for some time. For example, GDP growth has averaged six-to-eight percent over the past decade, a median age of 28 and a rapidly growing middle class. According to Bain & Company, consumption will grow to US$5.7 trillion in 2030, from US$1.5 trillion in 2018. All these factors paint a compelling story, but investor interest is also being bolstered by the reform agenda that is moderating many of the barriers to entry that have existed in India's commercial real estate space. 

Major policy shifts include the Real Estate (Regulation and Development) Act, 2016, which introduced measures to improve transparency, and relaxation of restrictions on foreign direct investment. The reforms have been extremely beneficial to both buyers and sellers and created a business environment that has made India more accessible to invest in than many emerging economies, which restrict foreign ownership.

On a broader level, in September 2019, India committed to spending US$1.5 trillion on new infrastructure. The announcement comes as part of a more ambitious plan to more than double the size of the Indian economy to US$5 trillion over the next five years.

For investors, despite more open access to India's attractive real estate market, the structural reforms have also brought enhanced transparency. And this, in turn, is influencing confidence at the start of the new decade. 

The office sector has been the most obvious beneficiary of reform-driven investment. Global investors like Brookfield and Blackstone have been active, respectively, acquiring billions of dollars' worth of office parks in booming IT cities such as Bengaluru. 

In a further sign of the rapidly maturing market and India's arrival as a global real estate asset class, REITS have also arrived on the scene. Last year, Blackstone launched India's first real estate investment trust in partnership with the local group Embassy. The market has responded favourably to India's first listed REIT, which has seen its unit price risen by one third since it floated, an oversubscription of 2.6x underlining further local and global confidence in this sector. It also stands as the largest REIT in Asia by square footage and will likely set a precedent was further listings.

The road to 2050

A common question we're asked is where to next for India's commercial real estate market?

From where we stand, the sub-class with the most apparent growth potential is logistics, which has seen substantial investment from sector specialists, often backed by global investors. Reforms are at the heart of this predication. Most recently, the introduction of a national goods and services tax (GST) in 2017 replaced a host of state taxes, which had made establishing national logistics networks complicated. 

Global investors quickly jumped following the GST introduction. Logistics heavyweights, including GLP, ESR, and Logos, have invested substantially in establishing India operations. And with longer-term themes including e-commerce growth and broader consumption expected by policymakers and economists alike, logistics investment is poised to heat up further in the coming years and decades. 

India has arrived at the commercial real estate party. Yes, commercial real estate has been a significant part of the property market for years, but the opportunity has neither be available or seized by global investors. The country's rapid growth, its projected changes, and a business-minded policy apparatus should instil the confidence and impetus for India's commercial real estate to become a more entrenched global asset class between now and 2050.