Global investors are shifting to alternative assets; institutional investments in Indian real estate are up 16% since 2021

The COVID019 pandemic, as well as interest rate fluctuations, have had a significant impact on the Asia-Pacific real estate sector. While COVID-19 is no longer considered a global health emergency, interest rate changes continue to play a role in the market’s direction. 

Global volatility has made the real estate market unpredictable. Owners and investors now value consistent yields over capital gains. Furthermore, investors and occupiers are increasingly aware of their ESG credentials. Quantifying the positive impact of green practices on property values requires collaboration among industry stakeholders. In an uncertain world, regular valuation reviews can help manage portfolio risk. 

India’s real estate investments have increased by 16% since 2021, thanks in part to central banks enforcing stricter monetary policies, slowing commercial real estate (CRE) growth in developed countries, and global investors shifting their focus to alternative investments. 

Bengaluru, India’s largest commercial real estate (CRE) market, has seen an increase in foreign and domestic investment. However, no significant cap rate compression has been detected. This lack of compression can be attributed to macroeconomic factors such as inflation, credit conditions, and interest rate policies, which affect asset valuations. 

Bengaluru’s commercial real estate (CRE) sector is expected to expand rapidly in the coming year, with rents rising modestly. These positive trends are influenced by macroeconomic factors, which keep cap rates relatively stable. While retail consumption growth is expected to slow, this will result in more consistent net operating income (NOI) growth and potentially fewer transactions in the retail asset market. Meanwhile, industrial cap rates may be slightly lower due to increased capital exposure and demand. 

Looking at the Mumbai region, there was a noticeable increase in consumption demand following the pandemic. This growth was most visible in average trade densities, which resulted in higher in-place rents for organized retail assets. These retail properties used a model that combined minimum rent with revenue sharing, resulting in higher Net Operating incomes (NOIs) and thus higher valuations.  

This hyper-growth was primarily limited to the luxury and premium market segments, with little benefit to the overall retail market, including high streets. Yields stabilized, maintenance capital expenditures increased, and gross rents remained flat, causing retail capitalization rates to remain range-bound in recent years. Cap rates for retail and commercial real estate (CRE) assets are expected to remain stable, as capital allocations and trades show no significant improvement from an institutional standpoint. 

Continued growth in private consumption, business demand, and supportive policy measures led to significant investments in industrial assets, particularly warehousing and data centers. As a result, asset valuations improved as cap rates fell 150-200 basis points below 2020 levels. Industrial cap rates are expected to decline slightly due to increased capital exposure, strong demand, and supportive incentive programs to encourage investment in this sector.   

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