The Indian real estate market is growing at a rapid pace. It is expected to increase to US$ 1 trillion in 2030 from US$ 200 million in 2021, making it the third largest globally. The real estate sector contributed around 7% to India's GDP in FY 2018-19, and its share is expected to advance to about 13% in 2025. The sector has robust forward and backward linkages with core sectors of the economy, namely, steel, cement, and other building materials, which directly/indirectly impacts 270 industries.
The commercial real estate market in India is well organised and highly competitive. Rising economy, digitalization, growth in the IT/ ITeS sector and varied government reforms (industrial corridors, FDI policy, RERA, REITs) have resulted in higher demand for the commercial real estate space. Global investment poured in as the government relaxed FDI norms, promoting the development of malls and other organized retail spaces. At the same time, the digital economy and e-commerce attributed to a demand for coworking office spaces, smart warehousing, and logistics hubs.
Total investments in Indian real estate have been growing at a very healthy pace, stood at USD 49.4 billion during the 2012-2021, of which 64% came from foreign investors. The foreign investments in office sector increased to USD 10.3 billion during 2017-2021, compared to USD 3.2 billion in the preceding five-year period. The growing interest in the commercial real estate sector can be attributed to the relaxation of the FDI policy, strong demand for warehouses by e-commerce and third-party logistics firms, robust demand for grade A office spaces, multiple multinational brands increasing their demand for state-of-the-art office spaces and alternative investment vehicles, such as REITs, which provide low-risk, good capital appreciation opportunities, stable income, and easy exit routes for foreign investors.
(Source: Federation of Indian Chambers of Commerce & Industry and Colliers)
The government has initiated several key reforms to assist the commercial real estate sector's advancement.
National Industrial Corridor Development Programme:
The National Industrial Corridor Development Programme is India's pioneering infrastructure programme aimed at developing new industrial cities as 'smart cities' and converging next-generation technologies across infrastructure sectors that can compete with the best manufacturing and investment destinations globally. This government initiative would boost the commercial real estate market investment and generate employment opportunities and economic growth, leading to overall socioeconomic development. This programme is an all-encompassing scheme with a sanctioned corpus of US$ 2.41 billion (Rs. 20,084 crores), of which US$ 0.73 billion (Rs. 6,115 crores) has been utilized to date. The Cabinet Committee of Economic Affairs (CCEA) approved the development of 11 industrial corridors with 32 nodes/projects proposed to be developed in four phases by 2024-2025 as part of the National Master Plan on multimodal connectivity.
Immediate results are visible as 173 plots admeasuring nearly 851 acres have been allotted to date with anchor investors, including HYOSUNG (South Korea), NLMK (Russia), HAIER (China), TATA Chemicals, and AMUL, attracting a combined investment of US$ 2.01 billion (Rs. 16,760 crores).
Clarity on the FDI Policy:
In March 2022, the Government of India reinstated that FDI is not permitted in an entity that engages or proposes to engage in the real estate business. Further, it provided clarity that 'real estate business' means dealing in land and immovable property to earn profit and does not include development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships and REITs registered and regulated under the SEBI (REITs) regulations 2014. Further, earning of rent/income on the lease of the property, not amounting to transfer, will not amount to real estate business.
As a result of the above clarity, it is expected that FDI would flow in the commercial real estate investments that are specifically excluded from the definition of real estate business, which would, in turn, increase the commercial real estate industry's market size in the foreseeable future.
Real Estate Regulation Authority (RERA):
RERA came into existence under the Real Estate (Regulation and Development) Act, 2016, which targets to protect home purchasers and boost real estate investments. RERA establishes a state authority that governs residential and commercial real estate transactions. Before the implementation of RERA and in the absence of any specific law to regulate the real estate sector, there was no recourse to any speedy grievance redressal mechanism; the developers had to seek complex approvals and sanctions from various authorities, which resulted in delays and cost escalation. RERA provides benefits through a simplified registration process, quick grievance redressal, more accountability and transparency in the real estate industry, and promotion of the real estate sector. The proper regulatory mechanism of the Act also increases the confidence of the financial institutions, FDI, and External Commercial Borrowings, thereby increasing investments in the real estate sector.
Real Estate Investment Trust (REIT)
REIT is an investment tool that offers proportional ownership of an income-generating real estate asset to small-ticket investors. Through "Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014" SEBI introduced REITs for increasing investment in the real estate sector and channelizing funds in a regularised and formal manner. Currently, REITs are only allowed to invest in the commercial real estate sector. In July 2021, SEBI decreased the minimum application value for REITs from ₹50,000 (US$ 600) to ₹10,000 -15,000 (US$ 120 – US$ 180), making REITs more accessible to small and retail investors.
Currently, there are 5 registered REITs: Brookfield India Real Estate Trust, Brookfield India Real Estate Trust, IIFL Real Estate Investment Trust, India Retail REIT, Sponsor- Wynford Investments Ltd, and Mindspace Business Parks REIT.
The government projects a positive outlook towards the real estate industry, which is expected to account for around 13% of India's GDP. The Indian commercial real estate market is recovering from the pandemic slump as companies in the IT sector, BFSI sector, knowledge industry, and the likes are gradually inviting employees to work from the office. Other factors that accelerate the recovery are favourable policy initiatives from the government, such as implementing RERA, encouraging FDI, establishing industrial corridor, and developing economic zones. Industrial demand is expected to rise due to the advancement of e-commerce, which would increase the demand for warehouses and logistics facilities. The industrial sector is expected to recover quickly from the pandemic as businesses adapt online shopping that would in turn maintain the steady flow of income in commercial real estate. India is a growing economy with technological advancements and various other industries, and the demand for commercial real estate is expected to advance.
Exchange rate used INR/USD- 0.012