Commercial real estate continues to be choice of investors
By Sheetal Agarwalla
With more than 24% of the country’s population vaccinated at least with one dose, the economy is set to normalize again. The country recorded a higher GDP growth rate - 1.6% in Q1/2021 as compared to 0.4% in Q4/2020, reflecting the gradual recovery. Even when Oxford Economics’ 2021 GDP growth forecast downgraded to 9.1% from 10.2%, the economic activity showed signs of recovery as the Index of Industrial Production (IIP) surged by 134% YoY in April 2021. The real estate sector, too, started witnessing the signs of recovery, including the commercial segment, which can be called the backbone of economic activities.
More than 250 ancillary industries are attached to the real estate sector, and numerous companies depend on real estate to erect commercial edifices to help them carry out the activities. The sector has been performing in overdrive mode to supply commercial properties across India. A report by JLL revealed the gross leasing volume grew to 14.7 million sq ft in the third quarter of 2020, witnessing a whopping 138 per cent increase quarter-on-quarter.
Multiple reasons contributed to the rapid recovery that began after the third quarter of 2020, including increased mall opening hours in many cities, a revival of food and beverage demand, and increased spending over the festival season. According to a Savills – Asia Pacific Investment Quarterly Q2 2021 report, during Q1/2021, investment-grade retail asset consumption quickly rebounded to pre-COVID Q1/2020 levels.
Commercial real estate will continue to be the favoured choice of investors due to its growth prospects and guaranteed profitable returns. Fractional investment, a novel and safe way to engage in commercial real estate has gained traction in the sector and is being pursued by several consumers. Investors are losing interest in the residential real estate market. Private equity inflows into the commercial market increased in 2017 and the trend has continued since then. According to Savills report, despite the pandemic-induced slowdown, the first half of 2021 saw around 41% of the investment inflows that the sector saw in the full year of 2020, demonstrating that investor confidence remains strong.
Some of the trends witnessed this year include a renewed interest in the retail sector by private equity institutional investors and the popularity of commercial office assets. Even though 2021 may not be immune to pandemic effects, the foundation for a sector-wide recovery has already been laid. The recent listings of Indian REITs are expected to improve developers' ability and inclination to build more commercial properties, resulting in more liquidity inflows into the commercial real estate asset class.
Meanwhile, the residential market's sustained end-user focus and the associated re-investment cycle risks would encourage additional commercial real estate investment. Investors are likely to focus on assets with greater yields to ensure income stability. While office assets are likely to continue to draw the most investment, assets like logistics and data centres will also grow in prominence. As the economy improves, retail and hotel investments may also gain traction.
(Writer is Managing Director of Galaxy and Sawasdee Group of Companies)