Why India Office Realty Is Pepping Up Amidst Global Doom

EARLY LAST YEAR, the late legendary investor and vice chairman of Berkshire Hathaway, Charlie Munger, warned about trouble in the U.S. real estate market in an interview with Financial Times. "We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There's a lot of agony out there." Late last year, as he had prophesied, Moody's Analytics CRE Q4 2023 preliminary trend report said office vacancy in the U.S. had risen to a record 19.6%. "Despite increasingly optimistic consensus on likelihood of a macroeconomic soft landing along with positive news from the labour market, the permanence of dynamic hybrid models has muted office demand, making 2023 the most downbeat since the great financial crisis," says the report.

In contrast, India's office space has been showing robust growth after Covid with net absorption in top seven office markets touching nearly 42 million sq. ft. in 2023, the second-highest ever (peak was in 2019). Institutional investment into Indian real estate was around $5.8 billion. Over half went into office spaces. There has been huge traction in listing of real estate investment trusts (REITs) and deal action in the secondary market. The latest being global private equity giant Blackstone, a co-sponsor of India's first REIT by Embassy Group, offloading its remaining 23.59% stake for over $830 million, according to estimates. Even after the sale, foreign portfolio investors own 40% in Embassy's REIT portfolio, up from 26.85% in November 2023, showing foreign interest in India's office assets.

As companies ask employees to return to office and global companies expand India operations, foreign investors are likely to see India in a positive light in 2024 as well. It will be a continuation of the trend set in 2023. A report by real estate advisory Colliers India says institutional investments (by family offices, foreign corporate groups, foreign banks, proprietary books, pension funds, private equity, real estate funds-cum-developers, foreign-funded NBFCs and sovereign wealth funds) in real estate sector rose 10% to $5.4 billion in 2023. Of this, over $3 billion went into the office segment. Of this $3 billion, almost $2.7 billion came from foreign investors backing big deals. First half of 2023 saw deals such as Brookfield India Real Estate Investment Trust and GIC co-investing nearly $1.4 billion to acquire commercial real estate interest held by Brookfield's PE arm in Mumbai and Gurugram. Following the acquisition, Alok Aggarwal, CEO, BrookProp Management Services Private Ltd., said the acquisition had resulted in increase in share of BFSI and consulting tenants from 32% to 40% and reducing the share of top five tenants from 52% to 31%. "Achieving scale and de-risking portfolio through acquisition of high-quality assets has been our objective. We're happy to be executing our plans," he says.

Other deals included Canadian Pension Plan (CPP) Investment Fund joining hands with RMZ Corp to develop office space in Mumbai's iconic Kamalistan studio. As per its 2023 annual report, CPP's exposure to emerging markets was 22% of its net assets, mostly in Asia Pacific and Latin America regions. As on March 31, 2023, its real assets portfolio, which includes real estate and infrastructure, was $135 billion; office segment accounted for 9% of it. GIC, the sovereign fund of Singapore, also picked up over a million plus sq. ft. in Phoenix's Aquilla in Hyderabad which is in the IT SEZ.

Piyush Gupta, managing director, Capital Markets & Investment Services at Colliers India, says foreign investors continue to focus on Grade A office assets. While much of existing assets are held either by institutional investors or corporates, foreign investors have a clear preference for collaborating with Tier-1 players for building newer spaces as well. This has resulted in multiple collaborations, for instance RMZ Corporation's partnerships with Qatar Investment Authority and Japan's Mitsui Fudosan, and Singapore's sovereign fund's collaboration with DLF and Phoenix. "Building new assets has own challenges right from getting RERA and other clearances to ensuring quality of construction. Investors are not willing to back a developer with limited experience," says Piyush Gupta.

Geographical Break-Up

While large U.S. funds have historically been most active backers of the office space segment, there has been a significant dip in share of investments from Americas, from a high of 52% in 2022 to 23% in 2023, says a JLL report. "Multiple rate hikes in the Americas have curbed investment activities from U.S. and Canada. However, 2023 saw a significant contribution from the APAC region," says Lata Pillai, senior managing director & head of capital markets, JLL India.

While most deals saw foreign investors buying built assets of Tier-I developers, CBRE India’s MD and co-head of Capital markets, Gaurav Kumar, says it is more a function of quality of the asset. "Even if a Tier-II developer has built a Grade A asset, there is no hesitation in buying it. But when a Tier-II developer wants to do a JV at the land stage, foreign investors are more selective," he says.

While experts expect the positive sentiment to continue, the slowdown in capital inflows in second half of 2023 signals caution among U.S. investors. Aashiesh Agarwaal, SVP, Research & Investment Advisory, Capital Markets, ANAROCK Capital, though, sees no near-term correlation between U.S. slump and funds investing in India. In the longer term, though, India's office real estate cannot remain completely divorced from fundamentals of U.S. economy and real estate, he says. As interest rates continue to impact the capital value of rental assets in the U.S. and both India and U.S. get ready for elections, "over the next few months, we expect the direction of domestic politics to be well established and interest rate to soften. This should spur the next leg of transactions in the space," says Agarwaal.