Indian real estate segment, while having its own challenges, is looking up from the industrial investment standpoint. With geo-political events such as Brexit, trade war between China and the USA, and rising global interest rates etc., global capital is looking at safe havens for investment. India’s commercial real estate could be seen as a prime beneficiary of this shifting access. Over the past few years, we have seen tremendous opportunities presenting themselves to global and domestic investors with clearly visible growth at the horizon. The last few years have seen many new trends taking shape in the Indian real estate markets, from consistent growth in the office market, to emergence of sunrise segments. For the investors of real estate, the Indian market is at a cusp of growth. Let us look at a few segments that can pose positive opportunities for institutional investors in the next few quarters.
Firstly, the Corporate Office Space which has seen very stable growth over the last few quarters. In fact, in 2018 office space leasing was at a record high, breaching the 46 millions square feet mark. This clearly indicates a growth in the corporate space usage. Currently, with reasonably limited supply in most prime markets, rental values have started to inch up promising strong rental yields to the potential investors. Already in the last few years, we have seen some landmark deals like Hiranandani group selling its office assets to Brookfield asset management; GIC investing in DLF Cybercity etc. There is a clear vision on the office sector growth. Prime rentals in the cities of Delhi and Bengaluru have experienced a year on year rise of over 6% and are expected to continue scaling upwards.
Another sun-rise segment witnessing a growth trend is the co-working segment. The segment, while making up approximately 2% of total leasing activities in 2018, however recorded a whopping 52% rise in space uptake. The sector is showing strong growth trends and is expected to remain buoyant going forward. Many global players have started to look at India as part of their global expansion plans. As maturity sets into the market, co-working phenomenon is expected to expand into the tier 2 and 3 markets.
Co-living is another sun-rise segment that is expected to see a rise, albeit on a very small base. In a survey that Knight Frank conducted recently has shown very promising attitude towards this segment. Our survey showed that 72% of millennials (18 – 23 years) have given co-living spaces a thumbs-up and over 55% respondents in the age group of 18 – 35 years are willing to rent co-living spaces. As an asset class, the biggest driving force behind the rising popularity of co-living spaces are young renters moving to new cities who are looking for easy access and reasonably-priced rental accommodation. Though the concept is still in nascent stage, co-living is here to stay, as Indian millennials currently account for 34% of the total population which is expected to increase to 42% by 2025. We feel that with the recent acceleration of growth in migrant population to key cities, rental housing by organised players will be able to bridge the housing gap.
While there are many challenges currently being faced by traditional sector of housing, the sector still provides good investment opportunity for institutional investment, especially in the affordable and mid-priced segment. However, the sector will have a few qualifiers like the location, the city’s growth fundamentals that would drive sales in the market. These locations would have to have a lower entry price with strong trend of price escalation in short to medium term.
The real estate sector has gone through some structural changes due to steps taken at the policy level, which has made it more secure and transparent for investors to invest in the sector. This will surely have its due impact on infusing institutional capital into the sector.