In 2016 and Q1 2017, residential projects (including townships) across India attracted an investment of more than INR 26,000 crore (or US$3.3 billion), more than 75 percent higher than what was received by commercial projects (including IT).
Land attracted 2.6 percent of the overall investment at INR 1,065 crore (or US$150 million) while retail struggled with less than 2 percent, or INR 870 crore (US$110 million), due to the lack of quality mall supply.
“Since 2010, office investment has only surpassed residential once, in 2014, with the latter remaining the preferred asset class for both institutional and private equity (PE) investors,” says Shobhit Agarwal, Managing Director of JLL’s Capital Markets team in India.
“Interestingly, however, equity flows have reduced in the residential sector in the last four-five years and made way for largely debt and structured instruments.”
According to Agarwal, the relative slowdown over the last three-four years has made investors somewhat conservative and turned them towards construction debt, last mile funding and bundling receivables to ensure that investments are protected against the lien of the asset.
“On the other hand, equity flows in the commercial asset class turned stronger, indicating that large investors are keen to look at equity positions, although the right asset remains a key consideration. The increasing share of equity financing is a strong indicator that investors are looking for project partners and points towards a positive sentiment for commercial assets,” explains Agarwal.
Recently, a major consideration for commercial assets has been the impending launch of REITs in India but, according to Agarwal, it remains to be seen if the introduction will eventually change sectoral inflows.
A changing landscape
A booming Indian office market was badly hit by the global financial crisis (GFC) in 2007-08, coming to a virtual standstill and leaving a host of unfinished buildings, perceptible lack of space demand and a subsequent sharp decline in rents and capital values.
Even before the beginnings of recovery in 2011, the residential sector had started to pick up the slack and was driving the industry forward with new project launches, sales and price appreciation and strong investor activity. The asset class became the darling of both institutional and private equity investors looking to make good their losses from the office asset class in the country.
“While the office market has been down, savvy investors have paid attention to the long-term growth potential of the sector,” says Agarwal.
“Occupier activity will emerge stronger as India regains its edge as the preferred destination for back-offices, high-end software development firms and financial services, and may even rival the residential sector for investment.”