India’s commercial property market is segmented into office, retail, industrial and logistics, and hospitality. According to a media research report, the commercial real estate market in India is expected to grow at a CAGR of around 13% during the forecast period FY 2022-2027. Short-term impact due to remote work trend caused by Covid pandemic is fading with campus reopening, return to office, increased retail footfall, business resumption , pent-up demand for travel explorations, etc. Demand for A-grade assets has increased sharply post-Covid in commercial property markets, with hygiene and social distancing taking center stage. It is estimated that by FY22, the absorption of Class A office space will exceed 700 million square feet in major metropolitan cities.
The demand from various sectors such as manufacturing, SME, electronics, auto accessories, e-commerce, 3PLs and retail is enhanced through the Atmanirbhar Bharat mission. Groundbreaking programs such as Make in India and policy reforms such as GST, RERA and IBC initiated by the Indian government bode well for the strengthening of the commercial real estate sector in India. It continues to attract the highest foreign direct investment for reasons of transparency, tax incentives and industry competence. Large scale investment by institutional investors is expected to fuel the accelerated growth of commercial real estate.
The positive recovery in economic growth supported by robust infrastructure development will drive demand for commercial real estate. Developers are optimistic about a healthy rebound in office leasing activity as investor confidence rises due to rapid economic resilience. Rising transaction volumes mean strong consumer demand and higher occupancy levels. Office design concepts modified to adapt to new models such as flexible workspaces, co-living, student accommodation and made-to-measure will be the future levers for growth.
Commercial real estate continues to offer better rental returns thanks to rapid urbanization of land and better job prospects. It is in high demand due to its recurring income potential with a high ROI of 6-10% return on investment and return on capital. It is a highly location-based industry driven by potential demographic and socio-economic factors.
Periodic global economic discord has recently prompted investors to assess the risk variance of investment assets in portfolio performance analysis. The idea of a capital market approach to real estate investing is gaining ground among portfolio management experts. The technique involves determining the time value of money, cash flow valuation, and hedged risk against return expectations. The performance of the newly launched investment instruments, REITs and InviTs, has not yet been benchmarked. With a strong presence in India’s commercial real estate market, REITs are expected to gain significantly as viable investment options. The share of REITs in overall market capitalization is substantial globally, where Indian REITs have yet to catch up.
The Indian commercial property market is very competitive. It is becoming a preferred destination for global institutional investors, thanks to strong absorption of office space, falling vacancy rates and rising rents. The sector is also experiencing a trend of post-Covid market consolidation as the need for capital funding grows.
However, despite all the ambiguity surrounding the future of offices in the wake of the pandemic, office assets continue to offer strong investment prospects, as evidenced by the amount of investment committed to the sector over the past fiscal year 2022. The commercial property market has matured along with the changing landscape of corporate finance in India.
(By Dr. Niranjan Hiranandani, CMD – Hiranandani Group and National Vice President – NAREDCO National)