Office sector receives 68% of PE investment in H1

Mumbai The office sector at 68 per cent accounted for the largest share of all private equity (PE) investments, says Knight Frank India, a leading international property consultancy in its latest report - Trends in Private Equity Investment in India – H1 2023.

According to it, the real estate sector in India received $2.6 billion in PE investments across office, warehousing and residential sectors in the first half of 2023. This is down 20 per cent from H1 2022 as PE investors adopted a measured approach in H1 2023, resulting in a conservative shift in investment strategies.

Despite prevailing global concerns influencing investments, the moderation in growth has been limited, and a rebound is anticipated in the second half of 2023. Overall, the PE investments in the Indian real estate sector are estimated to touch $5.6 billion in 2023, a 5.3 per cent YoY growth.

The office sector is followed by warehousing at 21 per cent and residential at 11 per cent share. Mumbai received highest investments accounting for 48 per cent, NCR stood second at 32 per cent and Bengaluru at 13 per cent. Nearly 75 per cent of investments came from Asian countries in H1, in contrast to 86 per cent investment received from Canada & US in H1 2022.

Talking to Bizz Buzz, Amal Mishra, Co-founder, Urban Vault, a Bengaluru-based managed co-working space provider, says: “It is not surprising to observe a substantial portion of private equity (PE) investments in India being directed towards the office segment.”

The market demand for Grade A office space, particularly flexible office spaces, is witnessing a notable surge. Both multinational corporations (MNCs) and domestic companies are showing a growing preference for modern office setups as opposed to traditional ones. This increased demand is not limited to the IT sector but spans across various industries and cities, he said.

As a result, we are witnessing significant investments in this real estate segment, and this trend is expected to continue for several years. The supply of Grade-A office space is still lower than the existing demand, further contributing to the attractiveness of this market, he added.

The tightened lending standards and geopolitical uncertainty on a global scale kept investors cautious and limited their involvement in the market. Since March 2022, the US Federal Reserve has implemented interest rate hikes on ten occasions, resulting in a 2.25 per cent point increase in rates, while the Central Bank of Canada has implemented nine such rate hikes, leading to a 2.75 per cent point increase in the overnight rate.

As a result, current interest rates in the US and Canada stand at 5.25 per cent and 4.75 per cent respectively, almost double compared to the pre-pandemic period. The impact of increased capital cost, and growing concerns of recession has subdued investment activity from these countries. In the first half of 2023, over 80 per cent of the total investments were directed towards ready assets, clearly indicating investors’ cautious stance.

The office sector received $1.8 billion in investments during H1 2023. The trend of office assets maintaining their lead continued in H1 2023, accounting for a 68 per cent share of total investments. The resilience of investable grade office assets supported this dominance. PE investments in the office sector experienced a YoY increase of 24 per cent in H1 2023. This growth was largely driven by a substantial deal worth $1.4 billion between GIC and Brookfield India Real Estate Trust (REIT).

Around 80 per cent of the investments in H1 2023 were in ready assets, while 20 per cent were allocated to new and under-construction developments, reflecting investor aversion to risks. Mumbai, NCR and Bengaluru emerged as leading investment destinations for office investments in H1 2023.

Residential sector attracted $277 million in investments during H1 2023. All PE investments in the residential sector were focused on under-construction projects, aiming for investments at early stage for better returns. Foreign PE players accounted for 82 per cent of the private equity investments in the residential sector. NCR and Bengaluru emerged as the leading investment destinations, driven by development stage transactions involving prominent global players.

In their previous analysis Knight Frank India projected that the overall private equity investments in Indian real estate across office, warehousing, residential and retail would reach $5 billion in 2022. This estimate was based on determinants such as government investment, currency trend, inflation, interest rate, and office supply. The actual private equity investment in 2022 was recorded at $5.3 billion, aligning closely with this projection.