Globally, $350 billion in dry powder is waiting to be invested in real estate, particularly in the commercial sector. This shift in capital flows, driven by the changing economic landscape, presents a unique opportunity for markets such as India to attract substantial investments that previously flowed into China. "India is barely getting $4 billion in real estate investments, but with the right corporate governance and transparency, this could increase to $25 billion," says Manoj Menda, chairman of the supervisory board at RMZ Corp. The Bengaluru-based private developer RMZ aims to develop 12 million square feet (msf) of office space this year, with a goal to expand to 50 msf by 2029.
Incidentally, according to consultancy firm Anarock, the aggregate value of private equity deals in Indian real estate fell from $5.1 billion in FY20 to $3.7 billion in FY24, owing to global macro-economic factors and geopolitical uncertainties. In fact, the overall share of foreign capital in total investments decreased to 65% in FY24 from 78% in FY20.
But compared to India, China’s real estate sector is in a mess, grappling with a massive debt crisis. Prominent realtors such as Evergrande and Country Garden are facing insolvency, with the government’s stringent regulations and high leverage contributing to the crisis. “China’s real estate debt is equivalent to India’s GDP. Every year, one new large company goes bust. Last year it was Country Garden, and this year it’s another. The government’s clamping down on the economy has led to a highly leveraged scenario that doesn’t add up,” says Menda.
According to GROW Investment Group, China is facing the prospect of a long-drawn correction in its property sector, with housing inventory likely to take more than 10 years to clear. In fact, according to China’s State Administration of Foreign Exchange (SAFE), net foreign direct investment into the Chinese mainland plummeted to a 23-year low last year at $42.7 billion in 2023, less than a quarter of flows seen in CY22. Consequently, the capital once directed towards China is now available for other markets. Despite India receiving a mere $4 billion in real estate investments, the potential for growth is immense, believes Menda.
Similarly, the narrative in the U.S. commercial real estate market has changed dramatically. With empty spaces and distressed assets, the market is currently in bad shape. Prices in the largest commercial property market in the world have tumbled by 11% since the Federal Reserve started raising interest rates in March 2022, erasing the gains of the preceding two years, mentions the International Monetary Fund. The era of cheap money driving the rise of commercial real estate has ended, leading to a reassessment of investment strategies. “This has created a favourable environment for alternative markets like India to attract global capital,” feels Menda.
India’s commercial real estate market, characterised by 98% occupancy in office buildings and a regulated financial system, stands in stark contrast to the U.S. Political stability, a burgeoning economy, and stable consumer demand offer a more secure investment opportunity for investors. “We have a regulated financial system that doesn’t let us lever up to unsustainable levels,” points out Menda, adding that “we’re in a much better position.”
Moreover, with $1.7 trillion in alternative assets waiting to be invested, the focus is shifting from traditional asset classes to alternative ones such as data centres, healthcare, and logistics. “India presents a lucrative opportunity as the market is underpriced, and with the potential for high returns, it’s an attractive destination for global investors,” believes Menda. Owing to the lower cost of acquisition and high demand, the yield on real estate investments in India can be quite high. Menda mentions that investments in India can fetch north of 20% internal rate of return, significantly higher than the returns seen in many Western markets. For instance, ASK Property Fund, the real estate private equity arm of the Blackstone-backed ASK Asset and Wealth Management Group, exited from three projects of QVC Realty Developers this month, fetching the fund an internal IRR of 20% on its investment of ₹200 crore.
For now, it seems domestic investors are making merry as of the total capital inflows into real estate seen in FY24, local investors accounted for 29%, a significant increase from 8% in FY20.
