YEAR 2023: FINISHING STRONG

BY Sapna

A good place to start with the New Year forecasts is the present year economic indicators. With September quarter witnessing above market’s expectations GDP, the RBI has confidently raised FY2023-24 growth forecast to 7.0% from 6.5% estimated earlier. India’s GST collections have been consistently rising year-on-year, and other monthly PMI surveys point towards sustained growth in consumption. However, risks to inflation continue to persist and rate cut cycle may have to wait.

THE REAL ESTATE INVESTMENTS

While, global geopolitical uncertainties and high interest rate environment in the western world mainly US and Canada have curbed their investment activities in Indian realty, PE investments from Singapore moved up in 2023.

As per Knight Frank India, Indian real estate market received private equity (PE) investments of USD 3.0 billion (bn) from January 01, - December12, 2023. office taking the lead with 58%, followed by warehousing at 23%, and residential properties at 19%. The retail sector did not witness any PE deal in 2023. Mumbai (USD 1,685 mn/1.6 bn), the National Capital Region (USD 835 mn) and Bengaluru (USD 347 mn) received the largest proportion of investments across sectors in 2023.

What is also evident in the current reaindustrial and data centers and asset diversification trend is expected to continue along with higher participation of PE’s in early-stage or under-construction developments.

MUTED IT SECTOR GROWTH BALANCED BY GCC & CIH

GCCs (Global Capability Centers remain bullish on India given its talent pool and competitively priced real estate market. According to Cushman & Wakefield, as of Q3-23, 125 new GCC centers have been established, surpassing level (81 centers) seen last year. More GCCs to enter India as per available market estimates. Available market estimates suggest another 150-200 new GCCs would be set-up in the country in 2024, indicating a sustained momentum in GCCs entering India and taking up good quality spaces.

Additionally, India’s market for Capability and Innovation Hubs (CIH) that are more advanced than Global Capability Centers (GCCs) is set to grow at 16% CAGR to reach $117 Bn by 2027. Currently, India is the leading hub in the CIH ecosystem with approx. 1600 centers and a market size of $65 Bn, as per Boston Consulting Group. Experts further suggest that different deal structures will co-exist. Performance credit, special situations, portfolio acquisitions, asset reconstruction and other innovative structures are likely to attract more investments. Moreover, amendments in alternate investment funds (AIFs), green financing, and REITs will simplify investments from foreign as well domestic investors.

RESIDENTIAL OVERVIEW

India’s residential sector continued to break new records and is expected to register highest sales. The growth momentum currently seen is expected to be carried forward in 2024 as well according to JLL’s recent report. Jan-Sep 2023 launches were 223,905 units (21.5% YoY growth). The full year 2023 projection is for sales to surpass 260k, launches to reach 280k (historic high since 2008) and 2024 sales projection is expected at 290k-300k units. Indeed, with many big developers from across cities having announced new launches and entry in new geographies, launches will continue to be strong in 2024.

Mid segment price category (INR 50 – 75 lac) dominated 9M 2023 sales like 9M 2022. However, share of premium segment (above INR 1.50 crore) has increased from 18% in 9M 2022 to 22% in 9M 2023. Delhi NCR and Mumbai have recorded maximum sales in first nine months of 2023 in the premium segment. Luxury segment (priced above INR 3 crore) sales went up by 83% from 8,013 units in 9M 2022 to 14,627 in 9M 2023.

With homebuyers upgrading to bigger sized homes, developers are launching luxury segment projects taking cognizance of this demand trend. Another notable trend is that attracted by quality products launched by developers, the risk appetite for consumers is increasing for under-construction projects. Launch of diversified products such as row houses, villas, and plotted developments too are gaining momentum. In terms of rental values, with the migration back to bigger cities, 2024 is likely to see rationalization in terms of rental values increase, more prominent in tech hubs like Bengaluru, Hyderabad and Pune.

OFFICE OVERVIEW

The first three quarters of 2023 witnessed healthy leasing activity across the 6 major office markets of the country, as per Colliers. Although share of Technology sector in overall office leasing saw a decline from 35% in 2022 to 25% in 2023, domestic companies across flex spaces, Engineering & Manufacturing, and BFSI stepped up the ante in taking incremental space. The momentum is likely to continue, and gross absorption is anticipated.

Flex spaces will further solidify their presence in occupiers’ portfolio, contributing almost one-fifth of the office space demand in the country. Flex space operators have leased close to 5.4 msf of Grade-A office space as of YTD 2023, accounting for over 11% of total gross lease volume for top-8 cities.

Rentals have remained largely range-bound during the year 2023 and are expected to remain so in 2024. Having said that, market could assign a premium to supply that qualifies as – institutional grade assets, green certified buildings, mixed-use grade-A projects in prime submarkets etc. As many occupiers aspire for net-zero compliance, the demand for green certified spaces could go up, and so will the premiums on rentals.

RETAIL OVERVIEW

In 2023, the retail sector remained devoid of any private equity deals due to heightened global economic concerns and increased interest costs, prompting investors to exercise caution, especially with significant investments. According to Knight Frank, the investor interest in the retail sector has broadened to extend beyond major metros, with notable traction in cities such as Chandigarh, drawing investments of USD 267 million, as well as Nagpur and Amritsar each attracting USD 100 million, Indore has seen investments of USD 61 million, and Bhubaneshwar has secured USD 46 million in investments.

Year 2023 is likely to end with near-about 5.0 MSF of new mall supply, predominantly (i.e. over 80%) of Grade-A category, across top-8 cities. This is the highest grade-A supply witnessed in recent period (post Covid), suggesting a complete turnaround in developers’ sentiment towards retail’s growth outlook, says Cushman & Wakefield research.

Furthermore, rents in prominent Indian main streets rose by an average of ~10% y-o-y, indicating a bullish outlook on rental growth. Limited mall supply prompted retailers to explore prominent main streets, resulting in robust demand and healthy leasing activity.

INDUSTRIAL & LOGISTICS OVERVIEW

Close to 40 MSF of L&I transactions have been recorded as of November 2023 across the eight major real estate markets. In the warehousing segment, 3PL continued to dominate with 41% share in leasing volume followed by Engineering & Manufacturing (E&M) with 28% share. In the industrial leasing activity, electronics and automobile took a combined share of 45% share of leasing activity.

The scarcity of high-quality ready assets was a contributing factor to the reduction in investments within the warehousing sector. Although Delhi - NCR continued to remain in the frontrunner, demand emancipating from Pune and Mumbai remained upbeat. The micro markets of Bhiwandi in Mumbai and Chakan-Talegaon in Pune witnessed maximum leasing activity at an India level.

In the coming year 2024, I& L leasing activity is expected to cross 50 msf given strong growth in India’s domestic consumption demand and industrial activity. Emerging corridors in each city will be continuing to see higher rental growth compared to established submarkets, owing to dearth of quality supply in established markets. We expect rental gap likely to widen to 30% as concentration of organized sector happens in some of the strongly emerging markets.

DATA CENTERS OVERVIEW

Colocation data centers that rent out rack space to third parties for their servers or other network equipment have witnessed significant traction in India. India is the largest consumer of data on smartphones across the world, and further explosion of data consumption will drive robust data center capacity addition in 2024.

In terms of installed colocation capacity, Mumbai is India’s data center capital with over 50% share of pan-India. Noida is emerging as a key regional hub where several Greenfield facilities are expected to go live in 2024. Noida is likely to surpass Bengaluru and reach levels chose to Chennai, which is currently the second largest in the country in terms of installed colo capacity. Kolkata is also likely to see more activity with a few Greenfield projects expected to go live.

Though Data Center C industry is witnessing expansion in tier-I cities, leading hyperscalers and cloud service providers are likely to expand to tier-II cities to capture the growing demand among BFSI firms and online streaming platforms and establish DC facilities closer to the consumption hubs.

WITH PROMINENT DOMESTIC REAL ESTATE PLAYERS AND GLOBAL INVESTORS LOOKING FOR EXPANSION IN THE INDUSTRIAL & WAREHOUSING SPACE, THE SECTOR IS LIKELY TO WITNESS INCREASED CONSOLIDATION, PAVING WAY FOR POTENTIAL WAREHOUSING REITS IN THE FUTURE.

WITH ADEQUATE INVENTORY AND UPTICK IN READY TO OCCUPY PROPERTY SUPPLY, THE RESIDENTIAL MARKET IS LIKELY TO BE EVENLY BALANCED BETWEEN HOMEBUYERS AND DEVELOPERS.

DURING 2024, MOST INVESTORS ARE LIKELY TO EXPAND THEIR PORTFOLIOS BEYOND CORE OFFICE ASSETS, EXPLORING ALTERNATE ASSET CLASSES SUCH AS DATA CENTERS, LIFE SCIENCES, HOLIDAY HOMES, CO-LIVING, ETC.

THE YEAR END OVERVIEW

Following a successful moon mission and hosting the G20 Summit, India’s attractiveness as an investment destination has become quite appealing. Not to mention the country’s size and scale of operations it has to offer to global companies, skilled talent pool, and technology prowess.

Many would agree that 2023 despite having a rocky start, has been one of the best performing years for Indian real estate. Institutional investments in Indian realty remained buoyant throughout 2023 led by investors’ unabated appetite for growth opportunities. The year has more or less, set the foundation for the

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