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Indian Real Estate: Altered courses and emerging stronger in 2024

Dec 20, 2023

Although, the start of the year was cautious, 2023 is on course to become one of the best-performing years in real estate sector across asset classes. Indian real estate market displayed exceptional resilience as optimism prevailed in domestic markets, despite volatility across the developed markets. Demand for commercial real estate is expected to match or even surpass the leasing records set in 2022. Domestic occupiers across diverse sectors such as technology, financial services, engineering & manufacturing, FMCG, and healthcare have ensured that the India office market remains active and grows from strength to strength. With continued adoption of “office dominant-hybrid work” and “hub & spoke” models, flex spaces particularly have been in high demand. Residential segment meanwhile performed significantly better than market expectations, drawing comfort from largely stable interest rates. Industrial & warehousing sector too is expected to put a commendable performance in 2023 led by strong growth in manufacturing output & expansion of logistics services. Institutional investments in Indian real estate remained buoyant throughout 2023 led by investors’ unabated appetite for growth opportunities.

2024 is likely to be a year of redemption where real estate will reshape, restructure, and realign on a stronger domestic footing. Although office assets will continue to constitute the bulk of investment inflows in 2024, alternate asset classes like data centres, life sciences and shared spaces will witness increased traction. Additionally, all throughout 2024 and beyond, sustainable elements and digital touchpoints will percolate across all real estate verticals.


2023 round-up: Office demand continues to remain buoyant

2023, largely anticipated to be a year of cautious optimism for commercial real estate in India, has eventually emerged stronger than market expectations. Even in the face of global geopolitical tensions and elevated inflation levels, the first three quarters of 2023 witnessed healthy leasing activity across the 6 major office markets of the country. Gross absorption touched 38 mn sq ft, equivalent to the corresponding period in 2022. 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. This diversification underscores India office market’s adeptness in countering external challenges. 2023 is expected to close on a stronger note; the momentum is likely to continue, and gross absorption is anticipated to be around 50 mn sq ft, at par or better than the historic performance of 2022. Flex spaces will further solidify their presence in occupiers’ portfolio, contributing almost one-fifth of the office space demand in the country.

2024 outlook: A year of dynamism and innovation

If 2023 has been a year of successfully overcoming the initial jitters, 2024 is expected to be the year of consolidation upon strong foundations, reflecting stability in India’s office market. Occupier needs will continue to evolve and market offerings will continuously realign themselves. Strong growth prospects in Indian economy and healthy domestic outlook will keep occupier as well as developer confidence intact. Demand- supply equilibrium will keep vacancy levels rangebound lending room for rental upside.

  • Portfolio diversification – “Core + Flex” strategy – Considering flexibility & scalability benefits offered by shared workspaces, the “Core + Flex” model will continue to be preferred by occupiers. Moreover, a steady adoption of intra and intercity “Hub and Spoke” models, will accentuate the trend of occupiers incorporating flex spaces in their real estate portfolio. Developers and operators too will increase their flex offerings, increasing the flex penetration in Grade A office stock closer to 10%, up from less than 5% before the pandemic.
  • Secondary, peripheral and tier II/III markets to witness heightened activity – With greater adoption of ‘Hub and spoke’ models and rental arbitrage coming into play, secondary and peripheral business districts are likely to remain office market hotspots across major cities. Occupiers will push for establishing their core offices in CBDs and at the same time seek satellite offices across secondary and peripheral markets. Improving connectivity, enhanced social & physical infrastructure and proximity to residential catchment areas will make peripheral micro markets particularly favourable for both conventional and shared workspaces. Simultaneously, select Tier II cities are primed for heightened office activity fuelled by talent availability, rise of hybrid work culture, infrastructure enhancements, and improving Grade A office supply.
  • Technology and GCC demand to bounce back – With expectations of receding impact of global economic headwinds, GCCs will resume real estate decisions in India. Owing to its talent pool, relatively lower office rentals and supportive legal framework, India will continue to remain a preferred destination for global players looking to setup their capability centers. Leading international tech companies will also expedite incremental space take-up in major office markets of the country. Meanwhile, domestic occupiers from sectors such as Engineering & Manufacturing, BFSI, Consulting, Healthcare, Edutech & E-commerce etc will continue to diversify the leasing landscape.
  • SEZs to see increased occupier activity- Recent amendments in SEZ regulations allowing floor-wise denotification is expected to boost leasing across SEZs, further improving occupancy levels. The amendment will not only facilitate the expansion of companies’ office spaces, but also extend the benefits of SEZ areas to Non-SEZ entities. The new regulations will diversify the SEZ tenant base by allowing occupiers from both export and domestic businesses. Overall SEZ vacancy level thus is likely to get reduced from current 20% levels to 10-15% in the next few years.
  • Focus on sustainable elements– Sustainability will increasingly take centre stage in Indian commercial real estate. A sizeable portion of upcoming supply will be green certified right from Day-1 of operation – in a way reflecting increasing occupier preference of sustainable elements including green-leases. Developers too are likely to benefit from upside in occupancy levels and rentals of green certified developments. Retrofitting of older assets and E-upgrade of existing developments will pick up pace, reducing the carbon footprint and improving the energy efficacy of India office ecosystem. Interestingly, ESG due diligence and assessments will increasingly be the norm in office market.


2023 round-up: Consecutive year of record high activity

Residential real estate activity in India is all set to outperform 2022, which witnessed decadal high sales across the major cities of the country. Both sales and launches in 2023, until the third quarter, have come close to 2022 levels. Considering the festive boost in Q4, 2023 is likely to witness 20-30% higher sales as compared to 2022. Given heightened demand across housing categories, average prices in 2023 have increased by up to 20% on an annual basis. Despite the rise, affordability of buying houses remains intact in India. With the repo rate remaining unchanged since February, financial obligations for the consumer have largely been stable. Higher growth in disposable income compared to the increase in housing prices have led to a strong housing demand throughout 2023 – be it for buying or renting out purposes.

2024 outlook: Growing tech savviness amidst moderation in activity

Although the momentum in residential real estate is likely to continue into 2024, we might witness the base effect coming into play and thus growth in sales, launches and prices will remain moderate. With adequate inventory and uptick in ready to occupy property supply, the residential market is likely to be evenly balanced between homebuyers and developers. Developers with a track record of timely execution of projects will continue to see good traction in the market.

  • Leveraging technology to the fullest- Home buying experience will increasingly involve seamless integration of artificial intelligence, machine learning and cloud computing. Homebuyers across age-groups will increasingly prefer smart homes, virtual tours, and digital transactions. Evolving construction technologies and environment-friendly practices are anticipated to provide further credibility to sustainable housing soon. Premium developments of reputed developers are likely to see technology playing a key role in delivering personalised services that improve comfort. Advanced technologies like AI and chatbots will be used for services like virtual concierge services, biometric authentication, higher security and thus provide an upscale living experience.
  • Surge in premium segment activity – Demand for second homes, vacation homes and plotted developments is likely to remain unabated in 2024. Given the envisaged momentum in high-end segment, companies with related expertise in hotels and luxury segment are expected to increasingly foray into the premium residential market of Tier I cities. Nevertheless, affordable, and mid-segment housing will continue to drive volumes. However, a perceptible increase in share of luxury housing in overall residential market sales is on cards for 2024.
  • Infrastructure projects to shape homebuying behaviour- With new airports, metro routes and arterial roads, most major Indian cities are undergoing a massive infrastructure upgrade. The upcoming infrastructure facelift will act as a catalyst for residential activity in the influence zones. Catchment areas along project corridors will witness significant capital value appreciation, attracting investors and end-users alike. As infrastructure projects get completed throughout 2024, peripheral areas will become integrated with central and suburban areas, resulting in homogenisation of activity across key residential pockets of respective cities.
  • Developers likely to expand into newer geographies- Owing to untapped potential and increased preference for comprehensive offerings in gated communities of tier II and III markets, organised residential real estate is well poised to embark on the next growth phase in markets like Vadodara, Nashik, Lucknow, Jaipur, Chandigarh, Coimbatore, Mysore, Kochi, Indore, Bhubaneshwar, Guwahati etc. Investors will increasingly look for residential investments in these cities which have a higher upside potential compared to Tier I cities. Developers are likely to infuse quality supply in such emerging markets and peripheral locations of metro cities as well.
  • Co-living and housing rentals to stabilize- The pandemic ushered in an era of remote-work & study and thus a reverse migration from bigger to smaller cities. However, by 2023, normalcy with respect to having a physical presence has been almost completely achieved. Most organisations have mandated at least a 2-3 day/week physical presence in offices. With the migration back to bigger cities effectively being completed, 2024 is likely to see rationalisation in terms of rental values increase. 2022 and 2023 witnessed rental values in certain micro markets go up by 30-40% YoY. Such steep increase in housing rentals including monthly charges in co-living properties is expected to rationalise in 2024. The moderation will be more prominent in tech hubs like Bengaluru, Hyderabad and Pune.

Industrial & warehousing

2023 round-up: Powering ahead with robust demand

Driven by government initiatives, increased institutionalization, persistent investor interest and an upswing in demand from 3PL and E-commerce players, the past few years can be envisaged as an accelerated growth phase for the industrial & warehousing sector of the country. During the first three quarters of 2023, the industrial & warehousing market witnessed 17 mn sq ft of gross leasing, almost comparable to the corresponding period of 2022. Although Delhi NCR continued to remain the frontrunner, demand emancipating from Pune and Mumbai remained upbeat during the nine-month period in 2023. The micro markets of Bhiwandi in Mumbai and Chakan-Talegaon in Pune witnessed maximum leasing activity at an India level. Third-party logistics players (3PLs) continued to be the top occupiers of warehousing space, contributing to about 40% share in total industrial & warehousing demand of India. Leasing momentum is expected to continue in the final quarter of 2023 led by 3PL, engineering and FMCG players and is likely to close in the range of 22-25 mn sq ft.

2024 outlook: Heightened interplay of sustainability and technological advancements

2024 is likely to be a continuation of bright prospects which will act as accelerated growth catalysts for the industrial & warehousing sector. India remains the fastest-growing major economy, harboring immense potential for real estate demand in the sector. Backed by rising capital investments, manufacturing output and supportive government policies, the industrial & warehousing sector is expected to grow from strength to strength in India. Furthermore, technology related aspects are going to be more pervasive throughout. Going forward, AI and IoT enabled monitoring and proliferation of smart & automated warehouses will redefine the industrial & warehousing sector.

  • Government policy thrust to materialize into demand uptick– Steadfast implementation of existing government programmes and projects such as Make in India, Gati Shakti, Multi-Modal Logistics Parks (MMLP), Performance Linked Incentives (PLI) scheme etc. will continue to provide a fillip to the industrial & warehousing ecosystem in the country. Key projects including SagarMala project and industrial corridors will prove to be major enabling factors in the growth story of industrial sector and translate into heightened demand for warehousing spaces across tier I and II cities of the country.
  • Q-commerce to fuel demand for micro-warehouses- With increasing demand for quick deliveries Q-commerce will further pick up pace, leading to heightened demand for micro-warehouses and in-city warehousing. Rise in number of micro-warehouses will lead to higher scale of operations, which in turn would lead to higher demand for hub warehouses.
  • EVs likely to propel new demand- Rapid growth in EVs and in turn battery manufacturing, is likely to create significant demand for land for setting up giga factories. EV related tax incentives and various incentives provided for battery manufacturing would boost production as well as real estate demand in the segment.
  • Consolidation on the cards– With prominent domestic real estate players and global investors looking for significant expansion in the industrial & warehousing space, the sector is likely to witness increased consolidation. This is likely to lead to increased institutionalization in the sector and bring in a combination of global and local expertise with respect to advanced technologies and operational efficiencies. Institutionalization of the sector is bound to pave way for potential warehousing REITs in the future.
  • Increased demand for green warehouses– In the next few years, there will be increased preference for sustainable and green certified warehousing spaces, and logistic parks with energy efficient systems, adaptive climate control solutions and efficient layouts. Moreover, investment considerations are also likely to factor adoption of sustainable elements more stringently.


2023 round-up: Institutional investments in Indian real estate remain firm

Institutional investments in India continued to remain resilient and attractive during January-September 2023. At USD 4.6 bn, the first three quarters  witnessed a 27% YoY increase in fund inflow, despite challenging business environment during the year. At 63% ,  office sector drove overall investment inflows during the period; the sector also witnessed some notable large deals. Industrial & logistics sector also witnessed a 3.5X surge in investment inflows; this can be attributed to sustained growth in manufacturing sector, which strongly corelates with consumption levels. While global investors continued to dominate funding activities with higher participation in entity-led deals, the annual growth in domestic investments was particularly remarkable at 70%. About half of the total investments by domestic investors was directed towards residential assets during the period. Institutional investment inflows for the full year is set to comfortably surpass 2022 levels of USD 4.9 Bn; it has already reached 93% of the last year’s volume in the first three quarters of 2023.

2024 outlook: Stable market conditions to create opportunity galore for investors

2024 definitely looks more positive and might see increased investor activity amidst a robust economic environment and positive play of market indicators. With global investors partnering with local developers, there is ample dry powder to be invested in the Indian real estate market, especially in office and industrial sectors which is likely to be deployed in a phased manner in the short term. Within APAC, India is expected to remain the most preferred emerging region owing to its fast-paced growth trajectory, attractive pricing, better valuations, and higher yields. Global as well as domestic investors will continue to allocate funds in various markets and asset classes while keeping their core focus towards office assets.

  • Alternative investments to rise – 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.
  • Industrial & warehousing sector to see uptick in investments – India’s manufacturing sector is growing at an impressive pace owing to robust demand and increased industrial output. Manufacturing, industrial & warehousing sectors are pivotal components in India’s journey towards a USD 5 trillion economy. Demography driven consumption pattern and rising warehousing demand from 3PL & E-commerce will result in attractive investment scenario for the industrial & warehousing sector in the short to mid-term.
  • Creation of more platforms and joint ventures – Amidst limited availability of ready office assets, investors will continue to create platforms and JVs with developers for developing high quality Grade A office assets across multiple locations. A robust Grade A under construction supply pipeline of over 150 mn sq ft in the next 3 years will provide multiple opportunities for investment in greenfield assets.

Different deal structures to co-exist – Performance credit, special situations, portfolio acquisitions, asset reconstruction and other innovative structures have been growing and are likely to attract more investments. Moreover, amendments in alternate investment funds (AIFs), green financing, and REITs are likely to futrther simplify investments from foreign as well domestic investors.

  • Green financing and sustainability reporting to gain increasing prominence– As sustainability increasingly becomes a key driver in investment decisions, green-financing is likely to gain prominence in India, provided there is a concerted effort by all stakeholders. With ESG reporting becoming gradually mandatory in India, investors will remain in constant pursuit for portfolios with well-defined sustainability goals and net-zero targets.
  • Attributed to Mr Badal Yagnik, Chief Executive Officer, Colliers India