Capital Market Update: Q4 2021
Discover investment drivers for 2022
- Samantak Das
- Jitesh Karlekar
Even though the investment momentum lost pace in Q4 due to the third COVID-19 wave, the preceding three quarters saw deals across real estate segments, including retail, alternatives, mixed-use developments, land and data centres.
The year 2021 could be termed “positive” for real estate even though institutional investments in the sector were at their lowest in seven years—even below 2020, the year that saw stringent lockdowns and restrictions.
There was optimism as deals were diversified and spread across various segments. There were 57 deals worth USD 4.3 billion in 2021. The year before witnessed investments to the tune of USD 5 billion, but they were spread across mere 27 deals, and two among them took the lion’s share of USD 3.2 billion.
Similarly, city-wise investment, too, was skewed towards Bengaluru in 2020, which accounted for 74% of the total investment. Last year, no one city witnessed such lopsided investments. Hyderabad and Mumbai Metropolitan Region (MMR) each received 16% of the total investments in the country.
Had the momentum witnessed in the first three quarters last year continued, the total investments could have reached pre-pandemic levels. But the third COVID-19 wave disrupted deals in the fourth quarter (Q4)—a period when investors are most active. Central banks across the globe tightening the money supply, or the anticipation of such an action, also made institutions re-look their investment strategies.
There was an 81% decline in investments in the Q4 of 2021 compared to the same quarter a year earlier.
A 14% decline year-on-year
Compared to 2020, last year saw a 14% decline in investments. One of the major reasons for this has been the intermittent breakdown in the deal-making process due to the severe impact of the second COVID-19 wave during the first half.
Though the investment climate showed signs of recovery during the third quarter, the onset of new variant led to restrictions and constraints by various state governments, which impacted travel. All this disrupted the economic recovery during the last quarter of the year.
14% y-o-y decline in investments during 2021
Residential segment made a comeback
One of the distinguishing features during the year was the comeback of the residential sector. It received 25% of the total investments—the second highest. The segment attracted USD 1,081 million, or 2.3x the investment it received in 2020, at USD 460 million.
The renewed interest was mainly due to the sharp recovery with a robust sales growth of 47% during the first nine months of 2021 over the same period the previous year. Investors provided structured funds to the segment as the return on investment (RoI) was closer to the equity.
Residential sector registers 2.3x growth over 2020 investments
Investments in the office sector continued to account for the largest share (31%) of the investment pie in 2021. The year before, it received 86% of the overall investments. Office space net absorption was up marginally—by 2% year-on-year (Y-o-Y)—at 26.2 million sq. ft. in the top seven cities, compared to the previous year.
The current year, 2022, could be robust for the segment. Most occupiers have their real estate plans in place. The likely net absorption could be 31-33 million sq. ft., up 20-25% Y-o-Y. Leading commercial office developers are expected to contribute around 58% of the upcoming supply of 45-47 million sq. ft. that may open development stage investment opportunities.
Warehousing, logistics and data centre continued to witness increased interest from investors, with logistics accounting for 20% of the total deals. Data centre investments have started picking up with a few joint ventures announced in the segment.
Other segments like retail, alternatives and mixed-use development, too saw interest during the last year, which was almost negligible in 2020.
Top three cities garnered a 45% share
Hyderabad and Mumbai each accounted for a 16% share of the total investments. National Capital Region (NCR)-Delhi, at 13%, stood third.
Hyderabad has led core and development stage transactions by leading global funds. Marquee office developers prefer the city, and it’s witnessing quality tenants coming in at the pre-commitment stage. Office supply in 2022 has already seen 25% preleasing in select projects and is driving the investment momentum.
On the other hand, Mumbai saw higher interest in the residential segment due to the sharp recovery in home sales during the year.
There’s a noteworthy trend: As consolidation happens in the real estate sector, an increase in investments at the entity level as mergers and acquisitions are gaining traction.
Visible trends in 2022
The year 2022 has started with the fast spread of the ‘Omicron’ variant leading to a slowdown in trade and commerce. Nonetheless, investors are likely to keep their investment plans intact with improved resilience to uncertainty.
The accommodative policy stance, the expected push on infrastructure spends and committed dry powder by institutional investors are expected to drive 2022 investments at par with the momentum witnessed during 2017-2020.
The build-up of asset portfolios for the listing of new REITs (real estate investment trusts), increased competition for quality assets, geographical and asset diversification, and a strong interest in logistics and data centres in the ‘new normal’ will be the major investment drivers during 2022.