In 2023, the global economic crisis caused a significant downturn in the commercial real estate sector around the world, with investments down 66% year-on-year. Major markets such as the United States and Europe saw leasing activity fall by around 25%. The global commercial market is in crisis.
Real Estate. (HT File Photo/Representative Image). (HT Photo) {{^userSubscribed}} {{/userSubscribed}} {{^userSubscribed}} {{/userSubscribed}}
In contrast, India's commercial real estate market has shown remarkable resilience and growth, attracting $5.4 billion in investments, its best performance since pre-pandemic 2020. India's office sector has been particularly buoyant, attracting over $3 billion in investments, up 53% year-on-year. The surge has been primarily driven by surging demand from the Global Capability Centers (GCC) and robust leasing activity by Indian companies, which now account for 46% of the total market leasing activity.
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Demand from the GCC has been a key driver of growth in the Indian office sector. India's GCC is expanding rapidly as global businesses seek efficient outsourcing solutions amid economic pressures. The GCC industry is projected to grow at a compound annual growth rate (CAGR) of 10% to reach $715 billion by 2027 from the current $465-510 billion. India accounts for a 30% share of the global GCC market, employing up to 2 million professionals.
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The GCC model is also now evolving from primarily cost arbitrage/standardization focused centers to customer experience and technology-driven hubs. This is driving growth in space per square foot and spend per square foot in these developments, further increasing investment in Grade A commercial real estate.
Currently, only 40-45% of Fortune 500 companies have GCC presence, so there is a lot of room for penetration.Given India's demographic advantage (an increase of 80-90 million working age population by 2027), over the next 3-4 years, India is expected to employ 3.5-4 million workforce in the GCC, doubling the Grade A space required.
Another key trend is the increasing share of domestic investors and capital, particularly foreign capital, flowing into the sector compared to historical rates. Preqin data highlights that there has been a sharp decline in foreign fund activity in India due to the global interest rate situation and geopolitical uncertainty. Despite these challenges, the Indian real estate sector has remained resilient and this resilience has been driven primarily by the growing share of a new investor base – ultra-high net worth individuals and family offices.
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These investors are increasingly attracted to the tangible safety of asset-backed investments and the regulated environment of Alternative Investment Funds (AIFs), and they are having a major impact on the real estate market, with around Rs 3 trillion already invested. This change highlights a dynamic shift in investment patterns and is driving more domestically led growth in the sector.
Looking ahead, we see a huge opportunity for tier 2 cities to emerge as new growth and commercial real estate investment hubs. In the US, Fortune 500 companies have their headquarters spread across 51 cities, whereas in India, all the top companies are concentrated in 5-6 cities. While transport infrastructure has made good progress, there is an urgent need to upgrade the urban infrastructure in these cities to improve livability and attract both businesses and employees.
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A change is afoot, with pioneering companies shifting their focus to second-tier cities, which have seen a two-fold increase in investment flows, primarily aimed at acquiring undeveloped land parcels. This trend signals the need for local and regional developers to step up their offerings to attract foreign investors who prefer ready-to-let or already-leased properties.
This restructuring will not only address saturation in tier 1 cities but also set the stage for more diverse and sustainable urban development across India.Going forward, these changes are expected to play a key role in shaping the real estate investment landscape in the coming years and usher in a new era of growth beyond traditional hubs.
This article was written by Rishabh Goel, Managing Director and Partner, and Yashi Tandon, Principal Knowledge Analyst and Team Lead, BCG.
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