Real estate investments continue despite global headwinds

Institutional investments in Indian real estate in Q2, 2022 (April-June) grew marginally to USD 966 million from Q1 2022 (Jan-March). However, it is noteworthy that Institutional investment-maintained momentum despite the backdrop of global economic and geopolitical headwinds. In Q2 2022 deal volumes reflect a resilient response to these changes, registering a marginal rise of 2% over the immediate quarter.

Investments in Q2 2022 have been lower by 27% on y-o-y basis as the visible impacts of global financial uncertainty became more pronounced during the quarter. This has led to lower deal volumes as compared to investments in Q2 2021.

2/3^rd share of investments in office sector followed by entity level investments at 11%

The rebound in the office sector with a return-to-office and renewed leasing led to improved investment sentiments as reflected in USD 652 mn capital flow during Q2 2022. There was a preference for core office assets indicating a preference for operational rent-yielding assets. Entity-level investments by offshore funds with one of the leading developers accounted for an 11% share of deal volume. The residential sector maintained its share of 6% as sustained growth has led to investments in the segment. Data centres investments picked up pace during the quarter as investors/operators purchased land parcels for expansions.

Real estate sector lending by banks¹ during the first 5 months of 2022 equals 75% of 2021 levels

The near standstill in the real estate segment during the pandemic was reflected in the sharp decline in net credit disbursal from USD 4 bn in 2019 to USD 1.5 bn in 2020. Construction finance dried up sharply as the project construction was stalled due to the pandemic conditions. However, the situation reversed in 2021 with the gradual return to normalcy.

Banking sector credit to the real estate sector witnessed 3.5x growth during 2021 as compared to the pandemic period due to the low-interest rates regime and relaxed lending norms. Residential real estate witnessed robust recovery post the waning of the pandemic. This improved cash flow positions of developers due to brisk home sales. The office sector witnessed 26 mn sq ft of net absorption in 2021 revving up the growth cycle. The improved balance sheets helped developers to access credit from the banking sector at low lending rates. This has been reflected in 3.5x growth in net credit disbursals.

The first five months of 2022 continued the growth momentum with a net credit disbursal of USD 4.0 bn which is 75% of the total disbursals in 2021. Developers are expected to benefit from the lower lending rates over the next few months only, as the lending rates will increase in line with interest rates. The increase in policy rates and consequent rise in lending cost is likely to result in developers turning to institutional investors for equity/asset divestment.

Outlook

Global capital markets are bracing new uncertainty created by the geopolitical situation which has panned out unintended outcomes. It has led to globalization of inflation, supply chain issues, currency volatility and capital outflows. The efforts by various central banks to rein in inflation by raising interest rates along with liquidity measures have raised questions over economic growth. Investment managers are waiting to deploy large dry powder in this uncertain scenario with increasing interest rates raising the returns benchmark.

Indian economy was also impacted by the global headwinds. However, the inherent strength of the economy has helped to maintain the growth momentum. Indian real estate continued to witness growth across segments during H1 2022 and is likely to maintain the trend. Investors are expected to remain optimistic about the emerging real estate scenario and commit more capital across asset classes. While office assets would be the preferred choice, the residential segment is expected to see more investor interest. Warehousing and Data Centres are expected to see competitive cap rates on the back of increased investor interest. Another asset that is slowly piquing investor interest is Life sciences. With more and more developers looking at the prospect of developing life science assets and conducive macroeconomic factors in place, we expect this sector to start seeing more activity soon.