Decadal low mortgage rates and attractive incentives have driven a significant uptick in residential sales
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The early 2020s will be remembered for so many events arising from the global pandemic, but one thing is certain: It’s made us aware of spaces—both where we are in them and where we want to be.
This awareness has helped the commercial real estate (CRE) sector emerge from a period of uncertainty and position it as an active agent in the economy’s recovery. India saw $2.4 billion of investments in real estate assets—a 52 percent year-on-year (YoY) growth in the first two quarters of 2021. Increased vaccination rates and continued stellar performance from the services sector have led to new absorption and high renewal rates of office spaces. Decadal low mortgage rates and attractive incentives have also driven a significant uptick in residential sales. Overall, CRE had an uneven-yet-productive year.
The pandemic has required us to reconsider the spaces we inhabit and their utility in the new normal. Inhabitants are now more aware of building protocols, construction materials, usage of clean energy, proper air filtration and circulation, and health and safety standards. The user now appreciates and differentiates on the basis of quality and services, and this is an encouraging milestone for the sector.
Why real estate is gaining importance in an investor’s portfolio and what’s in store in the decade ahead?
CRE is one of the largest asset types in the world. In the US, its size is estimated to be more than $16 trillion. This includes offices, malls, warehouses, rental apartments and hospitality, but excludes the homebuilding sector or individually-owned dwelling units. While India is a service-sector-led economy like the US, its approximately $500 billion CRE market is largely dominated by offices, and to a lesser extent by malls and hotels. Organised rental apartments and warehouses remain in their infancy, and it’s still early days for alternatives such as data centres and other specialised assets like senior living.
The buildout of this backbone of the economy will be exciting, as India approaches the $5 trillion GDP mark. Alternative investments such as real estate, infrastructure and private equity now receive more than 30 percent of allocations from the global institutional capital pool (versus approximately 5 percent a few decades ago). Managers of such capital find CRE in India attractive due to its a unique combination of: 1) Solid demand, led by rising urbanisation and growth in services-led industries. 2) Deepening of capital markets in a maturing regulatory landscape. 3) Strong real growth and reasonable inflation. We estimate that these attractive characteristics could result in a 10x increase in value of the CRE sector over the next few decades and represents a multi-trillion-dollar investment opportunity.
In this context, I want to address some misconceptions.
First, office spaces aren’t going away. In fact, the resilience of the office sector has been put to the test and it’s come out stronger. Globally, investments continue to flow towards the office space, while valuations have stayed stable. Office buildings provide a safe, collaborative environment that will continue to be at the core of innovation and organisational development.
Second, sectors that were heavily impacted during the pandemic, such as malls and hotels, have made a strong comeback. The lockdowns underscored the importance of experiences for both the leisure and the business traveller, resulting in outperformance by several hotel types—luxury, extended stay, etc. Similarly, we have seen the true value of physical retail transcend simply serving as a point-of-sale location. For the community, retail is a place to bring the family, meet friends and engage.
Finally, the world continues to urbanise at a rapid pace, and by 2050, more than two-thirds of the world’s population is expected live in urban areas from the 50 percent level currently. With an estimated 400 million addition to the urban population in three decades, Indian mega cities (population of more than 10 million) present unique challenges and tremendous opportunities. Real estate will continue to be the backbone of this growth, not only through the building of new schools, hospitals, stores, homes and offices, but also by supporting the interplay of the “live, work, play” phenomena and more “suburbanisation”.
Real estate buyers now appreciate and differentiate on the basis of quality and services
Image: Dhiaj Singh / Bloomberg via Getty Images
Some tips for selecting the right manager to make money for you:
Transparency: CRE has made giant strides in moving past the taint of being an opaque sector in the past; several challenges are yet to be overcome. Hence, managers with better governance structures will likely emerge as winners.
Investible: Ease of investing and divesting, as well as lesser friction costs, are core to institutionalisation and in creating a wider universe of investors. With the introduction of REITs, retail investors and portfolio managers have a vehicle to invest in small and large quantities, and across cities without physical proximity being a barrier.
Predictability: The quality of cash flows make CRE attractive in most economic periods. High-quality assets and tenancy increase the accuracy of forecasts, resulting in lower discount rates and higher value.
Sustainability: CRE will play a key role in the management of a global sustainability programme. We believe sustainability must be at the core of the definition of a good asset that’s “built to last”.
Some emerging themes in CRE:
Apartments/Rental Housing: While 2022 should continue to see growth in traditional home sales, I expect a larger share of young families looking for flexibility and affordability will continue to prefer the “value” option of renting. Expanding organised rental housing across income groups will result in the creation of new-format housing spaces, with further institutionalisation of multi-family housing, student housing, senior housing and plot developments.
Warehousing: Warehousing is a critical part of the supply chain in addressing the changes in consumption patterns of Indians and the rapid growth of ecommerce. According to Knight Frank, India has per capita warehousing stock of just 0.02 sq m, compared to the US, China and the UK, which have 4.4 sq m, 0.8 sq m and 1.09 sq m, respectively.
Responding to Climate Change: Estimates suggest that about 20 to 25 percent of India’s total energy demand comes from industries that manufacture building materials. While we actively decarbonise our economies to adapt to climate concerns, decarbonising the real estate sector and its supply chain will see a major shift in how we value, finance and invest in it.
Technology in Real Estate: The rise of smart buildings and adoption of digital twins (a building mapped on a software across all parameters) in real estate will transform digital integration from being mostly reactive to anticipating technological and client needs—saving both time and cost while increasing the quality of service provided.
In 2021, “we stood, and we stared” and took greater notice of the places we live and work in, returned to the hotels we craved, looked forward to being in office campuses, returned to schools and colleges that we all used to go to every day, and even happily shopped at stores. All to (re)experience the joys of being part of a community—a community made possible through a well-functioning network of property assets. In the coming year, and in the decade ahead, the CRE sector will continue to house our economy while ensuring that our cities remain the places and spaces of innovation and can respond to the disruptions on the horizon in ways that will only make us stronger together.
The writer is managing partner, head of real estate-India & Middle East, Brookfield Asset Management