Formalisation and expansion of the real estate sector is generating a huge need for capital, necessitating thinking beyond traditional sources
The fourth stage of evolution of Indian real estate has seen premiumisation (increasing share of luxury flats and Grade A offices), hybrid work (larger share of co-working spaces in leasing), and consolidation (rise of national level listed players) as per SBI Capital Markets (SBICAPS).
Formalisation of the sector, which started with RERA and IBC has reached a crescendo. These factors have increased the thirst for funds. Promoters have tapped into the QIP route aggressively in FY25 to raise equity. On the debt side, banks, with their exposure of Rs. 35+ trn are doing most of the heavy lifting. Yet, there are some crannies where traditional sources are constrained to lend due to regulatory mandate or risk perception – particularly land acquisition and stressed projects.
NBFCs tackled the need for institutional capital in early-stage real estate development during the 2010s… their space is now being gobbled up by private capital
The vacuum left by banks had erstwhile been occupied by NBFCs who expanded their CRE portfolios vigorously in the 2010s. Since then, the decline of some large NBFCs due to wholesale exposures and inadequate liability management and merger of a large HFC into a bank has made them cede ground to AIFs. Further, recent RBI norms have limited the ability of NBFCs from taking indirect exposure. Therefore, we are increasingly seeing that the high risk-reward early stage which involves land acquisition and construction financing is occupied by AIFs. Indeed, real estate is the largest investment sector for them, nearly double of the next sector. With several regulatory actions in favour of institutional capital and sectoral cashflows stabilising, the trend of diverse fundraising (IPOs, AIFs, sovereign wealth funds etc.) will continue.
Commercial realty, especially offices, represent a high-growth segment where opportunities exist for every investor’s risk-reward matrix
Office spaces had a breakthrough year in CY24, with leasing beating the previous record year by ~20%, rents increasing and vacancy decreasing. Momentum continues in CY25, with activity particularly strong in Bangalore, Delhi NCR, and Pune. GCC is emerging as the leading source of demand with MNCs using India for core functions instead of only for labour arbitrage – the outlook for them seems positive with their number expected to reach 1.3x in the next few years. Flex space operators are showing globally unprecedented success in India, and a string of IPOs in the space highlights the same. The rise of startups and strong MSME ecosystem will grow this more. With this rosy future, REITs have looked to first tap this market in India
REIT ecosystem for offices is well established... global experience shows that asset class diversification is needed to achieve true potential
REIT AUM has grown at a CAGR of 30% in the past 5 years driven by creation of new REITs and addition of new properties (largely ROFO). Indian REITs have till now been able to deliver steady distributions in a tax efficient manner and tided over the pandemic period largely unscathed as far as leasing-rental dynamics are concerned. With almost 500 msf of Grade A non-institutional office assets remaining in the stock, we estimate an additional REITable value of ~Rs. 7 trn. The global REIT ecosystem is much larger, and to achieve saturation like USA (where 98% of listed real estate is housed in REITs), there is a need to expand the scope beyond offices. While the retail REIT is welcome, forays into hotels, warehousing etc. are imperative
Regulatory ecosystem is conducive to widen the investor base, retail participation will increase as REIT AUM expands in the future
Over time, regulators have eased norms on sponsor stake, allowing dilution – so that REITs can achieve their primary goal of providing developers with an exit and recycling capital. Average sponsor stake has reduced from close to half at inception to less than one-third as on Jun’25. Correspondingly, the stakes of DII and FII has risen from 28% to 46% on average, with much of it coming from DII. No doubt this is greatly helped by regulatory largesse for key institutions such as DIIs enabling them to invest more in REITs. The retail investor, however, remains elusive. We believe availability of a larger number of asset classes and a steady stream of investible assets shall lead to the REIT AUM to increase at a 25-30% CAGR in the coming years
