Commercial real estate continues to be choice of investors
With more than 24% of the country’s population vaccinated with at least one dose, the economy will return to normal. The country recorded a higher GDP growth rate of 1.6% in Q1 2021 compared to 0.4% in Q4 2020, reflecting the gradual recovery. Even when Oxford Economics’ 2021 GDP growth forecast was cut from 10.2% to 9.1%, economic activity showed signs of recovery as the Industrial Production Index (IIP) rose 134% yoy in April 2021. The real estate sector also began to show signs of recovery, including the commercial segment, which can be described as the backbone of economic activity.
There are more than 250 ancillary industries affiliated with the real estate sector, and many companies in the construction of commercial buildings rely on real estate to carry out the activities. The sector has evolved in overdrive mode to serve commercial properties across India. A report from JLL found that gross lease volume rose to 14.7 million sq ft in the third quarter of 2020, up a whopping 138 percent from the previous quarter.
Several reasons contributed to the rapid recovery that began after the third quarter of 2020, including extended shopping malls opening hours in many cities, a revival in food and drink demand, and higher spending during the festival season. According to a report from Savills – Asia Pacific Investment Quarterly Q2 2021, investment grade retail asset consumption recovered rapidly to Q1 / 2020 pre-COVID levels in Q1 / 2021.
Commercial real estate will continue to be the preferred choice of investors due to its growth prospects and guaranteed profitable returns. Partial investment, a novel and safe way to get involved in commercial real estate, has grown in importance in the industry and is being pursued by several consumers. Investors are losing interest in the residential property market. Private equity inflows into the commercial market increased in 2017 and the trend has continued since then. According to the Savills report, despite the pandemic-induced slowdown, the first half of 2021 saw around 41% of the investment inflows the sector saw in full-year 2020, showing that investor confidence remains strong.
Some of the trends observed this year are the renewed interest of institutional private equity investors in the retail sector and the popularity of commercial office real estate. Even if 2021 may not be immune to the effects of a pandemic, the foundation for a sector-wide recovery has already been laid. Recent Indian REIT listings are expected to improve developers’ ability and propensity to build more commercial property, leading to more liquidity inflows into the commercial property asset class.
The ongoing end-consumer orientation of the residential real estate market and the associated risks of the reinvestment cycle would encourage additional investments in commercial real estate. Investors are likely to focus on higher-yielding assets to ensure income stability. While office real estate is likely to continue to attract the most investment, assets like logistics and data centers will also grow in importance. As the economy improves, retail and hotel investments can also pick up pace.
The author of this article is Sheetal Agarwalla, MD, Galaxy and Sawasdee Group of Companies
The views and opinions expressed are not from IIFL Securities, indiainfoline.com