With the general elections over and current policies likely to continue, India will maintain its position as the world's fastest growing economy and soon become the third largest economy with a GDP of around USD 7 trillion by 2030. Notably, India's recent growth surge has come amid several headwinds including geopolitical conflicts, supply disruptions, high commodity prices, a hostile trade environment and aggressive interest rate hikes by the Fed. India's macroeconomic fundamentals have been better than expected GDP growth, which given the nature of the large contribution of the services sector to India's GDP has had a sizeable positive impact on real asset returns, particularly commercial real assets.
Opportunities in the Indian Commercial Real Estate Market
Recent quarters have seen a notable improvement in commercial real estate market absorption, driven by a significant rise in Global Capability Centers (GCC) and demand from domestic clients. Unlike some global markets concentrated in a few major cities, India's diverse geography offers a multitude of options for companies seeking strategic locations. One of India's distinguishing features is its cost-effective real estate options compared to global hubs such as London, New York and Tokyo. Office space in Indian cities is often available at a fraction of the cost. This cost advantage is game-changing for companies looking to establish or expand their operations.
In terms of capital flows, the Indian Rupee has shown remarkable resilience against other currencies and the structural decline in risk premiums for Indian assets is expected to further boost foreign investor appetite. The quality commercial real estate sector offers rental yields of around 8-10%, which are expected to rise further due to the influx of global companies into India and growing domestic demand. In 2023, the commercial office market ended on a strong note, laying the foundation for a fresh upswing that will redefine the real estate market landscape over the next 2-3 years. India has seen a significant increase in Foreign Direct Investment (FDI), especially in the real estate sector, driving market liquidity and development.
Another driver of growth in FY25 is investments in digital innovation across the globe kickstarting a virtuous cycle of new projects, job creation and productivity, thereby benefiting the Indian IT/ITeS industry immensely. The Indian IT industry has bucked the trend of layoffs and once again proven its ability to mitigate a massive economic collapse. Revenue growth in the Indian technology industry has tripled since 2010 to $245 billion, with a projected growth of $500 billion by 2030. Given India's young and dynamic workforce with significantly lower salaries, the IT industry is expected to be at the forefront of the office space market.
The Rise of the GCC in India
India has seen a rapid rise in GCCs in the past few years. Currently, GCCs account for around 60% of the total office absorption, making them the most important factor behind the surge in absorption in recent years. Cheap labour as well as India's talented talent and favourable policies have attracted many multinational companies to the region. Currently, there are around 1,600 GCCs in India, employing over 1.6 million people. In addition to traditional accounting, back-office and related operations, these centres handle complex tasks such as artificial intelligence, research and development, advanced analytics and cybersecurity. Ernst & Young (EY) expects that around 2,400 GCCs will be operational in India by 2030, with an average of over 100 new facilities being added per year. As GCC and Indian companies continue to support growth, office market demand will continue to improve.
Outlook
The real estate investment landscape, especially in the commercial real estate sector, is undergoing a transformation due to factors such as a robust economy, improved regulations, new investment avenues, etc. The Indian real estate market is likely to “see brisk activity” in 2024, owing to high demand and favorable business environment.
Commercial real estate in India is expected to grow at an annual growth rate of 21.1% to reach USD 87.57 billion by 2028, and is becoming more popular than residential real estate due to higher profitability, with commercial rental yields at 8-10% compared to residential at 1.5-3.5%. According to a report published by Colliers, foreign inflows will account for 77% of total institutional investment in Indian real estate from 2019 to 2023, indicating continued confidence in the sector.
Funding for Indian real estate is primarily coming from the US and Canada, with interest also growing from Asia Pacific (APAC) countries Singapore, Hong Kong, South Korea and Japan. According to data from a report released by Colliers, APAC inflows into Indian real estate will double from $900 million in 2019 to $1.8 billion in 2023. Inflows from the region in 2023 will be 57% higher than the $1.1 billion in 2022.
Investing in the Indian commercial real estate market allows investors to take advantage of these favourable conditions and benefit from the country's ongoing economic and infrastructural transformation. Reduced liquidity premium, formalization, ease of doing business and an improving regulatory framework should further reduce investors' risk perception in Indian commercial real estate.