While2023 is on course to becoming one of the best performing years in Indian RealEstate, 2024 is likely to be a year of redemption where real estate willreshape, restructure, and realign on a stronger domestic footing, writes Badal Yagnik.
“Withadequate inventory and uptick in ready to occupy property supply, theresidential market is likely to be evenly balanced between homebuyers anddevelopers.”
- BadalYagnik,
Chief ExecutiveOfficer,
Colliers India.
Althoughthe start of the year was cautious, 2023 is on course to become one of the bestperforming years in real estate sector across asset classes. Indian real estatemarket displayed exceptional resilience as optimism prevailed in domesticmarkets, despite volatility across the developed markets.
Demandfor commercial real estate is expected to match – or, even surpass – the leasingrecords set in 2022. Domestic occupiers across diverse sectors, such astechnology, financial services, engineering and manufacturing, FMCG, and healthcarehave ensured that the India office market remains active and grows from strengthto strength.
With continuedadoption of ‘office dominant-hybrid work’ and ‘hub and spoke’ models, flexspaces particularly have been in high demand. Residential segment meanwhile performedsignificantly better than market expectations, drawing comfort from largelystable interest rates. Industrial and warehousing sector too is expected to puta commendable performance in 2023 led by strong growth in manufacturing output andexpansion of logistics services.
Institutionalinvestments in Indian real estate remained buoyant throughout 2023 led byinvestors’ unabated appetite for growth opportunities.
2024 islikely to be a year of redemption where real estate will reshape, restructure,and realign on a stronger domestic footing. Although office assets willcontinue to constitute the bulk of investment inflows in 2024, alternate assetclasses like data centres, life sciences, and shared spaces will witnessincreased traction. Additionally, all throughout 2024 and beyond, sustainableelements and digital touch points will percolate across all real estateverticals.
OFFICE
2023 round-up: Office demand continues toremain buoyant
2023, largelyanticipated to be a year of cautious optimism for commercial real estate inIndia, has eventually emerged stronger than market expectations. Even in theface of global geopolitical tensions and elevated inflation levels, the firstthree quarters of 2023 witnessed healthy leasing activity across the six majoroffice markets of the country. Gross absorption touched 38 mn.sq.ft.,equivalent to the corresponding period in 2022.
Althoughshare of Technology sector in overall office leasing saw a decline from 35 percent in 2022 to 25 per cent in 2023, domestic companies across flex spaces,Engineering and Manufacturing, and BFSI stepped up the ante in takingincremental space. This diversification underscores India office market's adeptnessin countering external challenges.
2023 isexpected to close on a stronger note; the momentum is likely to continue, andgross absorption is anticipated to be around 50 mn.sq.ft., at par or betterthan the historic performance of 2022. Flex spaces will further solidify theirpresence in occupiers’ portfolio, contributing almost one-fifth of the officespace demand in the country.
2024 outlook: A year of dynamism and innovation
If 2023 hasbeen a year of successfully overcoming the initial jitters, 2024 is expected tobe the year of consolidation upon strong foundations, reflecting stability inIndia’s office market. Occupier needs will continue to evolve and marketofferings will continuously realign themselves.
Stronggrowth prospects in Indian economy and healthy domestic outlook will keep occupieras well as developer confidence intact. Demand-supply equilibrium will keepvacancy levels range bound lending room for rental upside.
Portfolio diversification – ‘Core + Flex’ strategy: Considering flexibility and scalabilitybenefits offered by shared workspaces, the ‘Core + Flex’ model will continue tobe preferred by occupiers. Moreover, a steady adoption of intra and intercity ‘Huband Spoke’ models will accentuate the trend of occupiers incorporating flexspaces in their real estate portfolio. Developers and operators too willincrease their flex offerings, increasing the flex penetration in Grade Aoffice stock closer to 10 per cent, up from less than 5.0 per cent before the pandemic.
Secondary, peripheral, and tier II/III markets towitness heightened activity: With greater adoption of ‘Hub and spoke’ models and rentalarbitrage coming into play, secondary and peripheral business districts arelikely to remain office market hotspots across major cities. Occupiers will pushfor establishing their core offices in CBDs and, at the same time, seeksatellite offices across secondary and peripheral markets.
Improvingconnectivity, enhanced social and physical infrastructure, and proximity toresidential catchment areas will make peripheral micro markets particularlyfavourable for both conventional and shared workspaces. Simultaneously, select TierII cities are primed for heightened office activity fuelled by talentavailability, rise of hybrid work culture, infrastructure enhancements, and improvingGrade A office supply.
Technology and GCC demand to bounce back: With expectations of receding impact of globaleconomic headwinds, GCCs will resume real estate decisions in India. Owing toits talent pool, relatively lower office rentals, and supportive legalframework, India will continue to remain a preferred destination for globalplayers looking to set up their capability centres.
Leading internationaltech companies will also expedite incremental space take-up in major officemarkets of the country. Meanwhile, domestic occupiers from sectors such as Engineeringand Manufacturing, BFSI, Consulting, Healthcare, Edutech, and E-commerce, etc.,will continue to diversify the leasing landscape.
SEZs to see increased occupier activity: Recent amendments in SEZ regulations allowingfloor-wise denotification is expected to boost leasing across SEZs, furtherimproving occupancy levels. The amendment will not only facilitate theexpansion of companies’ office spaces but also extend the benefits of SEZ areasto Non-SEZ entities.
The newregulations will diversify the SEZ tenant base by allowing occupiers from both,export and domestic businesses. Overall SEZ vacancy level, thus, is likely toget reduced from current 20 per cent to 10-15 per cent in the next few years.
Focus on sustainable elements: Sustainability will increasingly take centrestage in Indian commercial real estate. A sizeable portion of upcoming supply willbe green certified right from day 1 of operation – in a way reflectingincreasing occupier preference of sustainable elements including green-leases. Developerstoo are likely to benefit from upside in occupancy levels and rentals of greencertified developments.
Retrofittingof older assets and E-upgrade of existing developments will pick up pace, reducingthe carbon footprint and improving the energy efficacy of India officeecosystem. Interestingly, ESG due diligence and assessments will increasinglybe the norm in office market.
RESIDENTIAL
2023 round-up: Consecutive year of record high activity
Residentialreal estate activity in India is all set to outperform 2022, which witnesseddecadal high sales across the major cities of the country. Both sales andlaunches in 2023, until the third quarter, have come close to 2022 levels. Consideringthe festive boost in Q4, 2023 is likely to witness 20-30 per cent higher salesas compared to 2022.
Given heighteneddemand across housing categories, average prices in 2023 have increased by up to20 per cent on an annual basis. Despite the rise, affordability of buyinghouses remains intact in India.
With therepo rate remaining unchanged since February, financial obligations for the consumerhave largely been stable. Higher growth in disposable income compared to theincrease in housing prices have led to a strong housing demand throughout 2023 –be it for buying or renting out purposes.
2024 outlook: Growing tech savviness amidst moderationin activity
Althoughthe momentum in residential real estate is likely to continue into 2024, wemight witness the base effect coming into play and, thus, growth in sales,launches, and prices will remain moderate. With adequate inventory and uptickin ready to occupy property supply, the residential market is likely to be evenlybalanced between homebuyers and developers. Developers with a track record of timelyexecution of projects will continue to see good traction in the market.
Leveraging technology to the fullest: Home buying experience will increasinglyinvolve seamless integration of artificial intelligence, machine learning, andcloud computing. Home buyers across age-groups will increasingly prefer smarthomes, virtual tours, and digital transactions.
Evolvingconstruction technologies and environment-friendly practices are anticipated toprovide further credibility to sustainable housing soon. Premium developmentsof reputed developers are likely to see technology playing a key role in deliveringpersonalised services that improve comfort. Advanced technologies like AI andchatbots will be used for services like virtual concierge services, biometric authentication,higher security, and, thus, provide an upscale living experience.
Surge in premium segment activity: Demandfor second homes, vacation homes, and plotted developments are likely to remainunabated in 2024. Given the envisaged momentum in high-end segment, companieswith related expertise in hotels and luxury segment are expected toincreasingly foray into the premium residential market of Tier I cities.
Nevertheless,affordable, and mid-segment housing will continue to drive volumes. However, aperceptible increase in share of luxury housing in overall residential marketsales is on cards for 2024.
Infrastructure projects to shape home buying behaviour: With new airports, metro routes, and arterialroads, most major Indian cities are undergoing a massive infrastructure upgrade.The upcoming infrastructure facelift will act as a catalyst for residentialactivity in the influence zones.
Catchmentareas along project corridors will witness significant capital valueappreciation, attracting investors and end-users alike. As infrastructure projectsget completed throughout 2024, peripheral areas will become integrated withcentral and suburban areas, resulting in homogenisation of activity across key residentialpockets of respective cities.
Developers likely to expand into newer geographies: Owing to untapped potential and increasedpreference for comprehensive offerings in gated communities of tier II and IIImarkets, organised residential real estate is well poised to embark on the nextgrowth phase in markets like Vadodara, Nashik, Lucknow, Jaipur, Chandigarh,Coimbatore, Mysore, Kochi, Indore, Bhubaneshwar, Guwahati, etc. Investors willincreasingly look for residential investments in these cities which have a higherupside potential compared to Tier I cities. Developers are likely to infusequality supply in such emerging markets and peripheral locations of metrocities as well.
Co-living and housing rentals to stabilize: The pandemic ushered in an era of remote work andstudy and, thus, a reverse migration from bigger to smaller cities. However, by2023, normalcy with respect to having a physical presence has been almostcompletely achieved. Most organisations have mandated at least a 2-3 day/weekphysical presence in offices.
With themigration back to bigger cities effectively being completed, 2024 is likely tosee rationalisation in terms of rental values increase. 2022 and 2023 witnessedrental values in certain micro markets go up by 30-40 per cent YoY. Such steepincrease in housing rentals – including monthly charges in co-living properties– is expected to rationalise in 2024. The moderation will be more prominent intech hubs like Bengaluru, Hyderabad, and Pune.
Industrial and Warehousing
2023 round-up: Powering ahead with robustdemand
Drivenby government initiatives, increased institutionalization, persistent investorinterest, and an upswing in demand from 3PL and E-commerce players, the pastfew years can be envisaged as an accelerated growth phase for the industrial andwarehousing (I&W) sector of the country. During the first three quarters of2023, the I&W market witnessed 17 mn.sq.ft. of gross leasing, almostcomparable to the corresponding period of 2022.
AlthoughDelhi-NCR continued to remain the frontrunner, demand emancipating from Puneand Mumbai remained upbeat during the nine-month period in 2023. The micromarkets of Bhiwandi in Mumbai and Chakan-Talegaon in Pune witnessed maximum leasingactivity at an India level.
Third-partylogistics players (3PLs) continued to be the top occupiers of warehousingspace, contributing to about 40 per cent share in total I&W demand of India.Leasing momentum is expected to continue in the final quarter of 2023 led by3PL, engineering, and FMCG players and is likely to close in the range of 22-25mn.sq.ft.
2024 outlook: Heightened interplay ofsustainability and technological advancements
2024 islikely to be a continuation of bright prospects which will act as acceleratedgrowth catalysts for the industrial and warehousing sector. India remains thefastest-growing major economy, harbouring immense potential for real estatedemand in the sector.
Backedby rising capital investments, manufacturing output, and supportive governmentpolicies, the I&W sector is expected to grow from strength to strength. Furthermore,technology related aspects are going to be more pervasive throughout. Goingforward, AI and IoT-enabled monitoring and proliferation of smart and automatedwarehouses will redefine the I&W sector.
Government policy thrust to materialize into demanduptick: Steadfastimplementation of existing government programmes and projects, such as Make inIndia, Gati Shakti, Multi-Modal Logistics Parks (MMLP), Performance-LinkedIncentives (PLI) scheme, etc., will continue to provide a fillip to the I&Wecosystem in the country. Key projects including SagarMala project andindustrial corridors will prove to be major enabling factors in the growthstory of industrial sector and translate into heightened demand for warehousingspaces across tier I and II cities of the country.
Q-commerce to fuel demand for micro-warehouses: With increasing demand for quick deliveries Q-commercewill further pick up pace, leading to heightened demand for micro-warehousesand in-city warehousing. Rise in number of micro-warehouses will lead to higherscale of operations, which in turn would lead to higher demand for hubwarehouses.
EVs likely to propel new demand: Rapid growth in EVs and, in turn, batterymanufacturing, is likely to create significant demand for land for setting upgiga factories. EV related tax incentives and various incentives provided forbattery manufacturing would boost production as well as real estate demand inthe segment.
Consolidation on the cards: With prominent domestic real estate players andglobal investors looking for significant expansion in the I&W space, thesector is likely to witness increased consolidation. This is likely to lead toincreased institutionalization in the sector and bring in a combination of globaland local expertise with respect to advanced technologies and operationalefficiencies. Institutionalization of the sector is bound to pave way for potentialwarehousing REITs in the future.
Increased demand for green warehouses: In the next few years, there will be increasedpreference for sustainable and green certified warehousing spaces, and logisticparks with energy efficient systems, adaptive climate control solutions, andefficient layouts. Moreover, investment considerations are also likely to factoradoption of sustainable elements more stringently.
INVESTMENTS
2023 round-up: Institutional investments inIndian real estate remain firm
Institutionalinvestments in India continued to remain resilient and attractive duringJanuary-September 2023. At US$4.6-bn, the first three quarters witnessed a 27per cent Y-o-Y increase in fund inflow, despite challenging businessenvironment during the year.
At 63per cent, office sector drove overall investment inflows during the period; thesector also witnessed some notable large deals. Industrial and logistics sectoralso witnessed a 3.5X surge in investment inflows; this can be attributed tosustained growth in manufacturing sector, which strongly correlates withconsumption levels.
Whileglobal investors continued to dominate funding activities with higherparticipation in entity-led deals, the annual growth in domestic investments wasparticularly remarkable at 70 per cent. About half of the total investments bydomestic investors was directed towards residential assets during the period. Institutionalinvestment inflows for the full year is set to comfortably surpass 2022 levelsof US$4.9-bn; it has already reached 93 per cent of last year’s volume in thefirst three quarters of 2023.
2024 outlook: Stable market conditions tocreate opportunity galore for investors
2024definitely looks more positive and might see increased investor activity amidsta robust economic environment and positive play of market indicators. Withglobal investors partnering with local developers, there is ample dry powder tobe invested in the Indian real estate market, especially in office andindustrial sectors which is likely to be deployed in a phased manner in theshort term.
Within APAC,India is expected to remain the most preferred emerging region owing to itsfast-paced growth trajectory, attractive pricing, better valuations, and higheryields. Global as well as domestic investors will continue to allocate funds invarious markets and asset classes while keeping their core focus towards officeassets.
Alternative investments to rise: During 2024, most investors are likely toexpand their portfolios beyond core office assets, exploring alternate assetclasses such as data centres, life sciences, holiday homes, co-living, etc.
Industrial and warehousing sector to see uptickin investments: India'smanufacturing sector is growing at an impressive pace owing to robust demand andincreased industrial output. Manufacturing, and I&W sectors are pivotalcomponents in India’s journey towards a US$5.00-trillion economy. Demography drivenconsumption pattern and rising warehousing demand from 3PL and E-commerce willresult in attractive investment scenario for the I&W sector in the short tomid-term.
Creation of more platforms and joint ventures: Amidst limited availability of ready office assets,investors will continue to create platforms and JVs with developers fordeveloping high quality Grade A office assets across multiple locations. Arobust Grade A under-construction supply pipeline of over 150 mn.sq.ft. in thenext three years will provide multiple opportunities for investment in greenfieldassets.
Different deal structures to co-exist: Performance credit, special situations,portfolio acquisitions, asset reconstruction, and other innovative structureshave been growing and are likely to attract more investments. Moreover,amendments in alternate investment funds (AIFs), green financing, and REITs arelikely to further simplify investments from foreign as well domestic investors.
Green financing and sustainability reporting togain increasing prominence: As sustainabilityincreasingly becomes a key driver in investment decisions, green-financing islikely to gain prominence in India, provided there is a concerted effort by allstakeholders. With ESG reporting becoming gradually mandatory in India,investors will remain in constant pursuit for portfolios with well-definedsustainability goals and net-zero targets.