Office sector in India receives 68% of PE investment in H1 2023: Report

Knight Frank India, a leading international property consultancy, on Wednesday said that the real estate sector in India received $2.6 billion in private equity (PE) investments across office, warehousing and residential sectors in the first half of 2023.

In its latest report - Trends in Private Equity Investments in India - H1 2023 (first half of 2023 - January to June) Knight Frank India cited that this amount is down 20 per cent from H1 2022 as PE investors adopted a measured approach in H1 2023, resulting in conservative shift in investment strategies.

Shishir Bajjal, Chairman and Managing Director of Knight Frank said, “Indian economic growth in the last few quarters has been a strong reason for long-term confidence among global investors. However, we have witnessed a decline in the volume of investments over the past year due to the economic challenges faced worldwide, leading some large economies to take drastic fiscal and monetary policy measures.  This has further caused investors to re-evaluate their strategies, at least in the short-term.”

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, PE investment in the Indian real estate sector is estimated to touch $5.6 billion in 2023, a 5.3 per cent year-on-year (YoY) growth.

The office sector at 68 per cent accounted for the largest share of all PE investments, 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 2023, in contrast to 86 per cent investment received from Canada & US in H1 2022.

“The India office sector continues to attract investors, particularly for ready income-yielding assets. Unlike other global gateway markets, India has consistently witnessed a steady growth momentum, which enhances investor confidence in the sector. Looking ahead, the office sector is expected to remain a favourite among investors, as it is likely to maintain its momentum in the short to mid-term,” said Shishir Bajjal.

Trends in PE investments in office assets

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 bn between GIC and Brookfield India Real Estate Trust REIT.

Trends in PE investments in residential

Residential sector attracted $277 million in investments during H1 2023, said the report. 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.

Investors Interest in retail moving beyond metros

Retail sector did not witness any deal in H1 2023. However, the listing of a retail REIT will likely lead to increased interest among investors.

The investor interest in the retail sector has expanded beyond major metros during the last decade. Apart from the metros or the key 8 markets, the traction is also seen in markets like Chandigarh attracting investment of $267 mn, Nagpur and Amritsar $100 mn each, Indore $61 mn, and Bhubaneshwar $46 million.

Trends in PE investments in warehousing sector

Investment in the warehousing segment experienced a contraction in H1 2023, with an amount of $555 million compared to $1.2 billion in H1 2022. The lack of supply of high-quality grade assets contributed to the slowdown in investments in the warehousing sector. PE investors are targeting various sub-sectors within the warehousing market, including e-commerce logistics and 3PL (third-party logistics) facilities.

Equity remains the preferred investment route for investors

Nealy 96 per cent of investors have taken the equity route to invest in H1 vs 60 per cent in 2022, whereas 4 per cent was via debt in H1 2023 vs 40 per cent in 2022.

The way ahead: Outlook 2023

Based on Knight Frank India’s investment forecasting model, which considers factors such as government investment, currency fluctuations, inflation, interest rates, and office supply, it projects a YoY growth of 5.3% in PE investments in India in 2023, reaching $5.6 bn.

"The outlook for PE investment in Indian office assets remains positive. As global headwinds subside, the resilience displayed by the Indian economy and the favourable unit economics of real estate assets will positively influence PE investment activity in the sector," said the property consultancy.

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